Question

The following data apply to the provision of psychological testing services:

Sales price per unit (1 unit = 1 test plus feedback to client) 900
Fixed costs (per month): Selling and administration 90,000
Production overhead (e.g., rent of testing facilities) 135,000
Variable costs (per test):
Labor for oversight and feedback 360
Outsourced test analysis 60
Materials used in testing 15
Production overhead 30
Selling and administration (e.g., scheduling and billing) 45
Number of tests per month 1,500 tests
Calculate the amount for each of the following (one unit = one test) if the number of tests is 1,500 per month.
Also calculate if the number of tests decreases to 1,250 per month.
1,500 Tests 1,250 Tests
a.Variable production cost per unit.
b.Variable cost per unit.
c.Full cost per unit.
d.Full absorption cost per unit.
e.Prime cost per unit.
f.Conversion cost per unit.
g.Contribution margin per unit.
h.Gross margin per unit.

Answer 1

For 1,500 tests For 1,250 tests

a. Variable production cost per unit 465 465

b. Variable cost per unit 510 510

c. Full cost per unit 660 690

d. Full absorption cost per unit 555 573

e. Prime cost per unit 435 435

f. Conversion cost per unit 540 558

g. Contribution margin per unit 390 390

h. Gross margin per unit 345 327

Step-by-step explanation:

To calculate these, the following formula will be used the calculations:

a. Variable production cost per unit = Labor + Outsourced test + Materials used + Production

b. Variable cost per unit = Variable production cost + Selling and administration

c. Full cost per unit = Variable cost per unit + (Total fixed costs / Number of tests)

d. Full absorption cost per unit = Variable production cost per unit + (Production overhead / Number of tests)

e. Prime cost per unit = Material + Labor + Outsource test analysis

f. Conversion cost per unit = Labor + Outsource test + Variable production overhead+ (Fixed production overhead / Number of tests)

g. Contribution margin per unit = Sale price - Variable cost per unit

h. Gross margin per unit = Sale price - Full absorption cost

Therefore, we can now proceed as follows:

1. Calculate the amount for each of the following (one unit = one test) if the number of tests is 1,500 per month.

a. Variable production cost per unit = Labor + Outsourced test + Materials used + Production = 360 + 60 + 15 + 30 = 465 per unit

b. Variable cost per unit = Variable production cost + Selling and administration per unit = 465 + 45 = 510 per unit

c. Full cost per unit = Variable cost per unit + (Total fixed costs / Number of tests) = 510 + ((90,000 + 135,000) / 1,500) = 510 + (225,000 / 1,500) = 510 + 150 = 660 per unit

d. Full absorption cost per unit = Variable production cost per unit + (Fixed production overhead / Number of tests) = 465 + (135,000 / 1,500) = 465 + 90 = 555 per unit

e. Prime cost per unit = Material + Labor + Outsource test analysis = 15 + 360 + 60 = 435 per unit

f. Conversion cost per unit = Labor + Outsource test + Variable production overhead + (Fixed production overhead / Number of tests) = 360 + 60 + 30 + (135,000 / 1,500) = 360 + 60 + 30 + 90 = 540 per unit

g. Contribution margin per unit = Sale price - Variable cost per unit = 900 – 510 = 390 per unit

h. Gross margin per unit = Sale price per unit - Full absorption cost per unit = 900 – 555 = 345

2. Also calculate if the number of tests decreases to 1,250 per month.

a. Variable production cost per unit = Labor + Outsourced test + Materials used + Production = 360 + 60 + 15 + 30 = 465 per unit

b. Variable cost per unit = Variable production cost + Selling and administration per unit = 465 + 45 = 510 per unit

c. Full cost per unit = Variable cost per unit + (Total fixed costs / Number of tests) = 510 + ((90,000 + 135,000) / 1,250) = 510 + (225,000 / 1,250) = 510 + 180 = 690 per unit

d. Full absorption cost per unit = Variable production cost per unit + (Fixed production overhead / Number of tests) = 465 + (135,000 / 1,250) = 465 + 108 = 573 per unit

e. Prime cost per unit = Material + Labor + Outsource test analysis = 15 + 360 + 60 = 435 per unit

f. Conversion cost per unit = Labor + Outsource test + Variable production overhead + (Fixed production overhead / Number of tests) = 360 + 60 + 30 + (135,000 / 1,250) = 360 + 60 + 30 + 108 = 558 per unit

g. Contribution margin per unit = Sale price - Variable cost per unit = 900 – 510 = 390 per unit

h. Gross margin per unit = Sale price per unit - Full absorption cost per unit = 900 – 573 = 327