Step 1
You have been asked to look at production options for the Android01, since production methods and allocation of costs have implications for cost per unit. Two alternative methods of production are being considered. Begin by gathering data (using financial information in decision making), then determine the suitability of the project.
The production of Android01 will share some production facilities and service divisions with Processor01. Fixed costs are $5 million per year, and will be assigned at the rate of 30 percent to Android01 and 70 percent to Processor01.
The variable cost of the production facilities and service divisions is $25 million per year. The square footage of factory space and labor needed for the production of 500 units of Processor01 and 300 units of Android01 are listed below.
| Square Feet | Labor | |
| Processor01 (500 units) | 70,000 | 120 |
| Android01 (300 units) | 30,000 | 80 |
The remaining cost for the production of Android01 is for components, at $25,000 per unit.
Before starting on your calculations, review materials on Production Cost Allocation.
Question 1: In Method B, what would be the cost per unit of producing Android01 using factory space as the allocation basis? What would be the cost per unit using labor as the allocation basis?
Before starting on your calculations, review materials on Activity-Based Costing and Management Activity Based-Costing Method
Question 2: What would be the cost per unit of producing Android01 using activity-based costing? Discuss the differences in the cost per unit of Android01 using space as an allocation basis, using labor as an allocation basis, and using activity-based costing. Which method do you think is the most accurate way to assign costs?
Before starting on your calculations, review materials on Markup Pricing
Next, suppose IPS uses markup pricing for Android01. Fixed costs are $4.5 million, and for a level of production of 300 units, the variable cost per unit is $48,000.
Question 3: What is the price of the Android01 at 30 percent markup over full cost?
Step 2
The CEO’s next question is, “What level of output would be required to maximize our profit on the MiniZ?” You have calculated the variable cost per unit for different levels of production. From market research, you have a schedule of prices for these levels. The information for MiniZ is summarized in the table below:
| Number of Units | Variable Cost per Unit ($) | Sale Price per Unit ($) |
| 200 | 60,000 | 70,000 |
| 250 | 54,000 | 66,000 |
| 300 | 48,000 | 64,000 |
| 350 | 46,000 | 59,000 |
| 400 | 45,000 | 52,000 |
A recommendation on output could affect everyone in the company, from management to sales, to the floor manager and assembly line workers! You don’t want to get this one wrong so you take some extra time to proof your calculations.
Before starting your calculations, review materials on Maximization Output.
Question 4: Based on profit-maximization analysis, what level of output of MiniZ should you recommend to the CEO?
Your CEO has also asked you to prepare a production cost budget for the MiniY for May 20X8. The actual costs in April 20X8 were as follows:
| MiniY: Production Cost Budget | |
| April 20X8 | |
| Production–Units of MiniY | 3,000 |
| Components cost (variable) | 24,000,000 |
| Labor cost (variable) | 13,500,000 |
| Rent (fixed) | 6,000,000 |
| Depreciation (fixed) | 6,000,000 |
| Other (fixed) | 2,000,000 |
| Total | $51,500,000 |
For the month of May, the number of MiniY produced will increase to 3,200, reflecting an anticipated sales increase related to a new marketing campaign.
Before starting your calculations, review materials on integrating accounting and financial information
Production Cost Budget Report
Question 5: Using the above information, prepare a budget for MiniY for May 20X8, stating the total cost. Use a spreadsheet to display your data and calculations.
IPS operates a factory, which produces the MiniY and the MiniX. During September 20X8, the factory produced 3200 units of MiniY and 3000 units of MiniX. The joint cost related to the operation was $3,000,000. MiniX sells for $27,100 per unit and MiniY sells for $25,000 per unit. Allocate the joint costs using the relative sales values of MiniY and MiniX.
Profit or Loss Report and Calculations
Question 6: With the costs that you calculate, what is the profit or loss associated with MiniY? NOTE:Assume that the variable and fixed costs mentioned in Question 5 are also applicable to Question 6 when calculating the profit or loss for MiniY. The costs for this question will be the total of the cost calculated in the above MiniY: Production Cost Budget plus the share of costs of the $3,000,000 (from the paragraph above) allocated to MiniY.
