Question

Blue Skies Inc. is a retail gardening company that is piloting a new strategic initiative aimed at increasing gross profit. Currently, the company’s gross profit is 25% of sales, and its target gross profit percentage is 30%. The company’s current monthly sales revenue is $480,000.

The new initiative being piloted is to produce goods in-house instead of buying them from wholesale suppliers. Its in-house production process has two procedures. The makeup of the costs of production for Procedure 1 is 40% direct labor, 45% direct materials, and 15% overhead. The makeup of the costs of production for Procedure 2 is 50% direct labor, 25% direct materials, and 25% overhead. Assume that Procedure 1 costs twice as much as Procedure 2.

Required:
Determine what the cost of labor, materials, and overhead for both Procedures 1 and 2 would need to be for the company to meet its target gross profit.

1. Cost makeup of Procedure 1:

Direct Labor
Direct Materials
Overhead
Total

2. Cost makeup of Procedure 2:

Direct Labor
Direct Materials
Overhead
Total

Answer 1

Cost of Procedure 1: $268,800

Cost of Procedure 2: $134,400

Step-by-step explanation:

Sales $480,000.

Gross Profit 25% of $480,000.= $ 120,000

Cost of Goods Sold = 480,000-120,000= $ 360,000

Procedure 1 costs twice as much as Procedure 2

Process 1 costs $ 240,000 Process 2 costs $ 120,000

To get a gross profit of 30% the sales would increase by

0.25 480,000

0.3 x

x= 480,000*0.3/0.25= $576,000

Sales $576,000.

Gross Profit 30% of $576,000.= $ 172,800

Cost of Goods Sold = 576,000-172,800= $ 403,200

Procedure 1 costs twice as much as Procedure 2

Process 1 costs $ 268,800 Process 2 costs $ 134,400

Procedure 1

1. Cost makeup of Procedure 1:

45% direct materials, = 45% of $ 268,800 = $ 120,960

40% direct labor, = 40% of $ 268,800 = $ 107,520

15% overhead.= 15% of $ 268,800 = $ 40,320

Total $268,800

Procedure 2

2. Cost makeup of Procedure 2

25% direct materials,=25% of $ 134,400 = $ 33,600

50% direct labor,= 50% of $ 134,400 = $ 67,200

25% overhead.=25% of $ 134,400 = $ 33,600

Total 134,400

1. Cost makeup of Procedure 1:

Direct materials, $ 120,960

Direct labor, $ 107,520

Overhead. $ 40,320

Total $268,800

Procedure 2

2. Cost makeup of Procedure 2

Direct materials $ 33,600

Direct labor, $ 67,200

Overhead. $ 33,600

Total 134,400