Product cost: ABC Company believes that it has an additional 5,000 machine hours available in the current facility before it would need to expand. ABC Company uses machine hours to allocate the fixed factory overhead, and units sold to allocate the fixed sales expenses. Based on current research, ABC Company expects that it will take twice as long to produce the expansion product as it currently takes to produce its existing product.
ABC Product Information
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Current Product
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Expansion Product
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Selling price
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$14.50
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?
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Units produced and expected to be sold
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80,000
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5,000
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Machine Hours
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40,000
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5,000
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Direct Materials
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$1.30 per unit
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$5.60 per unit
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Direct labor dollars needed per product
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$2.80 per unit
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$4.00 per unit
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Variable Factory Overhead
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$1.00 per machine hour
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$1.00 per machine
hour
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Variable Selling Expense
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$0.20 per unit
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$0.20 per unit
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Total Fixed Costs:
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Fixed Factory Overhead
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198,000
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Fixed Selling expenses
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191,250
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a. What is the product cost for the expansion product under absorption and variable costing?
b. By adding this new expansion product, it helps to absorb the fixed factory and sales expenses. How much cheaper does this expansion make the existing product?
c. Assuming ABC Company wants a 40% gross margin for the new product, what selling price should it set for the expansion product?
d. Assuming the same sales mix of these two products, what are the contribution margins and break-even points by product?
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ABC Company
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Cash Flow statement (Direct Method)
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Dec 31,2002
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Cash Flows from operating Activities
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Received From customers
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1260000
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Paid to suppliers
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830000
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Paid for expenses
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250000
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Paid for taxes
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0
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Cash flow from operating activities
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180000
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|
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|
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Purchase of fixed Assets
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100000
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Cash used in investing activities
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100000
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Paid for dividends
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100000
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Cash used in financing activities
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100000
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|
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|
|
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Overall change in cash flows
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-20000
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Opening Balance of cash
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70000
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Ending balance of cash
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50000
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