Question 1
Assume that Sony and Microsoft both plan to introduce a new hand-held video game. Sony plans to use a heavily automated production process to produce its product while Microsoft plans to use a labor-intensive production process. The following revenue and cost relationships are provided:
|
|
Sony Game
|
Microsoft Game
|
|
Selling price per unit
|
$100
|
$100
|
|
Variable costs per unit
|
|
|
|
Direct materials
|
$18.00
|
$18.00
|
|
Direct labor
|
5.00
|
20.00
|
|
Overhead
|
5.00
|
20.00
|
|
Selling and administrative
|
2.00
|
2.00
|
|
Annual fixed costs
|
|
|
|
Overhead
|
$400,000
|
$160,000
|
|
Selling and administrative
|
90,000
|
90,000
|
Required:
a) Compute the contribution margin per unit for each company.
b) Prepare a contribution income statement for each company assuming each company sells 8,000 units.
c) Compute each firm's net income if the number of units sold increases by 10%
d) Which firm will have more stable profits when sales change? Why?
Question 2:
Morris Company makes one product, and it expects to incur a total of $400,000 in indirect (overhead) costs during 2007. Production of the product for the year is expected to be:
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|
Quarter
|
|
|
1
|
2
|
3
|
4
|
|
Estimated production in units
|
40,000
|
15,000
|
27,000
|
38,000
|
Required:
a) Calculate a predetermined overhead rate based on the number of units of product expected to be made during 2007.
b) Assuming that direct materials and direct labor costs are $8 and $6, respectively, determine the total cost per unit using the overhead rate you calculated in part a).