Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 51

Basic Concepts

The following data apply to the provision of psychological testing services.

Sales price per unit (1 unit = 1 test plus feedback to client)	$ 300
Fixed costs (per month):
Selling and administration	20,000
Production overhead (e.g., rent of testing facilities)	30,000
Variable costs (per test):
Labor for oversight and feedback	120
Outsourced test analysis	20
Materials used in testing	5
Production overhead	10
Selling and administration (e.g., scheduling and billing)	15
Number of tests per month	1,000 tests

Required

Give the amount for each of the following (one unit = one test):

a. Variable production cost per unit.

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b. Variable cost per unit.

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c. Full cost per unit.

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d. Full absorption cost per unit.

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e. Prime cost per unit.

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f. Conversion cost per unit.

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g. Contribution margin per unit.

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h. Gross margin per unit.

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i. Suppose the number of units decreases to 800 tests per month, which is within the relevant range. Which parts of (a) through (h) will change? For each amount that will change, give the new amount for a volume of 800 tests.

Step 1 of 17

Prepare gross margin income statement and contribution margin income statements, before determining the required costs and margins.

Gross margin Income statement

Sales Revenue (1,000 tests × $300 per test)		$300,000
Less: Cost of goods sold
Materials used in testing (1,000 tests × $5 per test)	$5,000
Labor for oversight and feed back (1,000 tests × $120 per test)	$120,000
Outsourced test analysis (1,000 tests × $20 per test)	$20,000
Variable production overhead (1,000 tests × $10 per test)	$10,000
Fixed production overhead	$30,000	$185,000
Gross margin		$115,000
Less: Selling and administrative costs
Fixed Selling and administrative costs	$20,000
Variable Selling and administrative costs (1,000 tests × $15 per test)	$15,000	$35,000
Operating profit		$80,000