Question

Fanning Corporation builds sailboats. On January 1, Year 3, the company had the following account balances: $70,000 for both cash and common stock. Boat 25 was started on February 10 and finished on May 31. To build the boat, Fanning had incurred cash costs of $5,700 for labor and $3,500 for materials. During the same period, Fanning paid $10,760 cash for actual manufacturing overhead costs. The company expects to incur $237,500 of indirect overhead cost during Year 3. The overhead is allocated to jobs based on direct labor cost. The expected total labor cost for the year is $125,000. Fanning uses a just-in-time inventory management system. Consequently, it does not have raw materials inventory. Raw materials purchases are recorded directly in the Work in Process Inventory account. Required

Use the horizontal financial statements model, to record Fanning’s business events. The first row shows beginning balances.
If Fanning desires to earn a profit equal to 20 percent of cost, for what price should it sell the boat?
If the boat is not sold by year-end, what amount would appear in the Work in Process Inventory and Finished Goods Inventory on the balance sheet for Boat 25?
Is the amount of inventory you calculated in Requirement c the actual or the estimated cost of the boat?

Answer 1

To determine the selling price for Boat 25 with a desired 20 percent profit margin, we calculate the total cost including labor, materials, and allocated overhead, and then apply the profit margin to find a price of at least $24,036.

Step-by-step explanation:

Calculating the Cost of Boat 25

To answer the student's initial request, we need to first calculate the expected overhead allocation rate. This is done by dividing the expected indirect overhead cost by the expected total labor cost, which gives us $237,500 / $125,000 = $1.90 of overhead for every $1 of direct labor. Next, we calculate the total cost of Boat 25, which includes direct labor, direct materials, and allocated overhead. The allocated overhead for Boat 25 would be $5,700 (direct labor) × 1.90 (overhead allocation rate) = $10,830. Adding up all costs: $5,700 (labor) + $3,500 (materials) + $10,830 (allocated overhead), results in a total cost of $20,030.

Now, to calculate the desired selling price to achieve a 20 percent profit margin, we can multiply the total cost by 120 percent: $20,030 × 1.20 = $24,036. Hence, Fanning Corporation should sell Boat 25 for at least $24,036 to achieve their profit goal.

If the boat is not sold by year-end, the amount of inventory for Boat 25 that would appear in the Work in Process Inventory and Finished Goods Inventory is its total cost of $20,030. This cost is estimated based on the applied overhead rate and the actual labor and material costs.

Answer 2

The Fanning Corporation should sell Boat 25 for $24,036 to achieve a 20 percent profit over cost, which is $20,030. This cost includes allocated manufacturing overhead based on direct labor costs. The $20,030 represents the estimated cost in the balance sheet accounts if the boat is not sold.

Step-by-step explanation:

To calculate the desired selling price for Boat 25 built by Fanning Corporation, we need to find the total cost and then add a 20 percent profit margin. The total cost includes direct labor, materials, and allocated manufacturing overhead.

The overhead rate is calculated using the expected total labor cost and the expected total overhead cost. In this case, the rate is $237,500 divided by $125,000 in labor costs, which equals 1.9. Thus, for every dollar of labor cost, $1.90 is allocated for overhead. The $5,700 labor cost for Boat 25 will then have additional overhead costs of $5,700 x 1.9 = $10,830 allocated. The total cost for Boat 25 is the sum of direct labor, materials, and allocated overhead, which adds up to $5,700 + $3,500 + $10,830 = $20,030.

For a 20 percent profit, Fanning Corporation should sell the boat for $20,030 x 1.20 = $24,036. If the boat is not sold by year-end, the amount of $20,030 in combined Work in Process and Finished Goods Inventory would appear in the balance sheet. This amount represents the estimated cost rather than the actual cost since it includes allocated overheads based on estimated rates rather than actual overhead costs incurred.