Imperial Devices (ID) has offered to supply the state government with one model of its security screening device at “cost plus 20 percent.” ID operates a manufacturing plant that can produce 66,000 devices per year, but it normally produces 60,000. The costs to produce 60,000 devices follow: Total Cost Cost per Device Production costs: Materials $ 4,500,000 $ 75 Labor 9,000,000 150 Supplies and other costs that will vary with production 2,700,000 45 Indirect cost that will not vary with production 2,700,000 45 Variable marketing costs 1,800,000 30 Administrative costs (will not vary with production) 5,400,000 90 Totals $ 26,100,000 $ 435 Based on these data, company management expects to receive $522 (= $435 × 120 percent) per monitor for those sold on this contract. After completing 500 monitors, the company sent a bill (invoice) to the government for $261,000 (= 500 monitors × $522 per monitor). The president of the company received a call from a state auditor, who stated that the per monitor cost should be: Materials $ 75 Labor 150 Supplies and other costs that will vary with production 45 $ 270 Therefore, the price per monitor should be $324 (= $270 × 120 percent). The state government ignored marketing costs because the contract bypassed the usual selling channels. Required: For each of the four situations, calculate the cost basis per device based on the information shown above. (Round intermediate calculations and final answers to 2 decimal places.) Options: Only the differential production costs could be considered as the cost basis. The total cost per device for normal production of 60,000 devices could be used as the cost basis. The total cost per device for production of 66,000 devices, excluding marketing costs, could be used as the cost basis. The total cost per device for production of 66,000 devices, including marketing costs, could be used as the cost basis.

Imperial Devices (ID) has offered to supply the state government with one model of its security screening device at “cost plus 20 percent.” ID operates a manufacturing plant that can produce 66,000 devices per year, but it normally produces 60,000. The costs to produce 60,000 devices follow: Total Cost Cost per Device Production costs: Materials $ 4,500,000 $ 75 Labor 9,000,000 150 Supplies and other costs that will vary with production 2,700,000 45 Indirect cost that will not vary with production 2,700,000 45 Variable marketing costs 1,800,000 30 Administrative costs (will not vary with production) 5,400,000 90 Totals $ 26,100,000 $ 435 Based on these data, company management expects to receive $522 (= $435 × 120 percent) per monitor for those sold on this contract. After completing 500 monitors, the company sent a bill (invoice) to the government for $261,000 (= 500 monitors × $522 per monitor). The president of the company received a call from a state auditor, who stated that the per monitor cost should be: Materials $ 75 Labor 150 Supplies and other costs that will vary with production 45 $ 270 Therefore, the price per monitor should be $324 (= $270 × 120 percent). The state government ignored marketing costs because the contract bypassed the usual selling channels. Required: For each of the four situations, calculate the cost basis per device based on the information shown above. (Round intermediate calculations and final answers to 2 decimal places.) Options: Only the differential production costs could be considered as the cost basis. The total cost per device for normal production of 60,000 devices could be used as the cost basis. The total cost per device for production of 66,000 devices, excluding marketing costs, could be used as the cost basis. The total cost per device for production of 66,000 devices, including marketing costs, could be used as the cost basis.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

	Total Cost		Cost per Device
Production costs:
Materials	$	4,500,000		$	75
Labor		9,000,000			150
Supplies and other costs that will vary with production		2,700,000			45
Indirect cost that will not vary with production		2,700,000			45
Variable marketing costs		1,800,000			30
Administrative costs (will not vary with production)		5,400,000			90
Totals	$	26,100,000		$	435

Based on these data, company management expects to receive $522 (= $435 × 120 percent) per monitor for those sold on this contract. After completing 500 monitors, the company sent a bill (invoice) to the government for $261,000 (= 500 monitors × $522 per monitor).

The president of the company received a call from a state auditor, who stated that the per monitor cost should be:


Materials	$	75
Labor		150
Supplies and other costs that will vary with production		45
	$	270

Therefore, the price per monitor should be $324 (= $270 × 120 percent). The state government ignored marketing costs because the contract bypassed the usual selling channels.

Required:

For each of the four situations, calculate the cost basis per device based on the information shown above. (Round intermediate calculations and final answers to 2 decimal places.)

Options:

Only the differential production costs could be considered as the cost basis.
The total cost per device for normal production of 60,000 devices could be used as the cost basis.
The total cost per device for production of 66,000 devices, excluding marketing costs, could be used as the cost basis.
The total cost per device for production of 66,000 devices, including marketing costs, could be used as the cost basis.

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