MBA 631 / Exercises

Exercise 1
At a production and sales level of 1,000 units, the company’s costs are as follows:
Variable manufacturing costs per unit $20
Allocated fixed manufacturing cost per unit $10
Variable selling costs per unit $ 5
Allocated fixed selling costs per unit $ 3

How much would the company have to spend in total (total cash outlay for both fixed and
variable costs), if it makes 1,200 units and sells 200 units (so that 1,000 units are in
ending inventory at the end of the period)?

Exercise 2
Turquoise Company manufactures widgets and other good stuff. When 12,000 widgets
are produced, the total cost per widget is $40, calculated as follows:
Materials (a variable cost) $10
Labor (another variable cost) 15
Variable overhead (yet another variable cost) 10
Fixed overhead (not a variable cost) 5

The company is considering buying its widgets, instead of making them (hence, the
company would become a widget wholesaler, but will still manufacture other good stuff).
The company can buy widgets from another company for $42 per widget. If the company
stops making widgets, total fixed costs will not change, although some of the facilities
currently being used to make widgets can be rented out, resulting in $50,000 in rental
income to the Turquoise Company. What would be the incremental cost or benefit to the
Turquoise Company from becoming a widget wholesaler instead of a widget
manufacturer?

Exercise 3
At a production level of 200 units, total costs for the factory are $9,000, consisting of
$8,000 in variable costs and $1,000 in fixed costs. Calculate total factory costs if
production increases 25%.

Exercise 4
Assume that the Little Rock Company calculates income in the following manner: All
manufacturing costs (variable and fixed) are treated as a cost of inventory, and the
“matching principle” is honored for these costs, such that the cost to make inventory
appears on the Income Statement as Cost of Goods Sold when the inventory is sold. All
non-manufacturing costs are expensed (appear on the Income Statement) when incurred
(i.e., the matching principle is not honored for these costs).
In 2010, the Little Rock Company incurred fixed manufacturing costs of $500,000 and
fixed non-manufacturing costs of $300,000. The Company made 10,000 units and sold
5,000. Variable manufacturing cost was $150 per unit. Variable non-manufacturing cost
was $30 for every unit sold (this was a sales commission). Revenue was $3,000,000.

Required: Calculate income for 2010.