Chapter 2, Problem 75P

Finding Unknowns

Mary’s Mugs produces and sells various types of ceramic mugs. The business began operations on January 1, year 1, and its costs incurred during the year include these:

On December 31, year 1, direct materials inventory consisted of 3,750 pounds of material. Production in that year was 20,000 mugs. All prices and unit variable costs remained constant during the year. Sales revenue for year 1 was $73,312. Finished goods inventory was $6,105 on December 31, year 1. Each finished mug requires 0.4 pounds of material.

Required

Compute the following:

1. a.      Direct materials inventory cost, December 31, year 1.
2. b.      Finished goods ending inventory in units on December 31, year 1.
3. c.       Selling price per unit.
4. d.      Operating profit for year 1.

To determine

Calculate the value of closing direct material for Company M.

Answer to Problem 75P

The closing direct material is $2,812.

Explanation of Solution

Closing stock of direct material:

The material used in the production of the goods is known as direct material. Direct material cannot be separated from the finished product. It is also known as raw material. Business adds value in the raw material and sells it as the finished goods.

Calculate the closing direct material:

$\begin{array}{c}\text{Closing stock of direct material = Units of closing stock }\times \text{ cost per unit}\\ \text{= 3,750 }\times \text{ \$0}\text{.75 (1)}\\ \text{= \$2,812}\end{array}$

Thus, the closing stock of direct material is $2,812.

Working note 1:

Calculate the cost of direct material per pound:

$\begin{array}{c}\text{Direct material cost (per pound) = Direct material cost (unit)}\text{}\times \text{ pound per unit}\\ \text{= \$0}\text{.3 (2) }\times \text{ 0}\text{.4}\\ \text{= \$0}\text{.75 per pound}\end{array}$

Working note 2:

Calculate the cost of direct material per unit:

$\begin{array}{c}\text{Direct material used (per unit)}\text{}\text{ = }\frac{\text{Direct material cost (\$)}}{\text{Units produced}}\\ =\frac{\$6,000}{20,000}\\ =\text{ \$0}\text{.3}\end{array}$

To determine

Calculate the value of closing finished stock in units for Company M.

Answer to Problem 75P

The closing finished stock in units is $2,750.

Explanation of Solution

Closing stock of finished stock:

Finished stock is the cost of the goods that are ready to sell. Business put some value on the raw material by way of manufacturing overhead and direct labor and produces the finished goods. The stock left unsold at the end of the year is known as the closing stock of finished stock.

Calculate the closing finished stock in units:

$\begin{array}{c}\text{Closing stock of finished stock (units)}\text{}\text{ = }\frac{\text{Total finised stock (\$)}}{\text{Cost per unit (3)}}\\ =\frac{\$6,105}{\$2.22}\\ =\text{ 2,750 units}\end{array}$

Thus, the closing finished stock in units is 2,750.

Working note 3:

Calculate the manufacturing cost per unit:

$\begin{array}{c}\text{Manufacturing cost (units) = }\frac{\text{Total manufacturing cost (4)}}{\text{Total units manufactured}}\\ =\frac{\$44,400}{20,000}\\ =\text{ \$2}\text{.22 per unit}\end{array}$

Working note 4:

Calculate the total manufacturing cost:

Particulars	Amount
Manufacturing cost:
Direct material	$6,000
Direct labor	$27,000
Indirect manufacturing cost (variable cost)	$5,400
Indirect manufacturing cost (fixed cost)	$6,000
Total manufacturing cost	$44,400

Table: (1)

To determine

Calculate the selling price per unit for Company M.

Answer to Problem 75P

The selling price per unit units is $4.25.

Explanation of Solution

Selling price:

Selling price is the amount that is charged per unit of finished goods sold to the customer. It is always set above the cost of the product to earn some margin over the cost of the product.

Calculate the selling price per unit:

$\begin{array}{c}\text{Selling price (unit)}\text{}\text{ = }\frac{\text{Sales revenue}}{\text{Units sold}}\\ =\frac{\$73,312}{17,250}\\ =\text{ \$4}\text{.25}\end{array}$

Thus, the selling price per unit is $4.25.

Working note 5:

Calculate the units sold:

$\begin{array}{c}\text{Units sold = Toal manufactured units - closing units}\\ \text{= 20,000 - 2,750}\\ \text{= 17,250}\end{array}$

To determine

Calculate the operating profit for Company M.

Answer to Problem 75P

The operating profit for Company M is $13,642.

Explanation of Solution

Operating profit:

Operating profit is calculated by deducting the full cost of the production from the sales of the business. Full cost of the production includes all the direct and indirect cost.

Calculate the operating profit:

Particulars	Amount
Sales revenue	$73,312
Less: cost of goods sold $\left(17,250\times \$2.22\right)$	$38,295
Gross margin	$35,017
Less: indirect manufacturing cost (variable cost)	$3,375
Less: indirect manufacturing cost (fixed cost)	$18,000
Operating profit	$13,642

Table: (2)

Thus, the operating profit is $13,642 for Company M.