CP26 You would like to start a business manufacturing a unique model of bicycle helmet. In preparation for an interview with the bank to discuss your financing needs, you develop answers to the following questions. A number of assumptions are required; clearly note all assumptions that you make.

1. a) Identify the types of costs that would likely be involved in making this product.
   b) Set up five columns as indicated.
   Product Costs
   Item Direct Materials Direct Labor Manufacturing Overhead Period Costs
   Classify the costs you identified in (a) into the manufacturing cost classifications of product costs (direct materials, direct labor, and manufacturing overhead) and period costs.
   c) Assign hypothetical monthly dollar figures to the costs you identified in (a) and (b).
   d) Assume you have no raw materials or work in process beginning or ending inventories. Prepare a projected cost of goods manufactured schedule for the first month of operations.
   e) Project the number of helmets you expect to produce the first month of operations. Compute the cost to produce one bicycle helmet. Review the result to ensure it is reasonable; if not, return to part © and adjust the monthly dollar figures you assigned accordingly.
   f) What type of cost accounting system will you likely use – job order or process costing?
   g) Explain how you would assign costs in either job order or process costing system you plan to use.
   h) Classify your costs as either variable or fixed costs. For simplicity, assign all costs to either variable or fixed, assuming there are no mixed costs, using the format shown.
   Item Variable Costs Fixed Costs Total Costs
   i) Compute the unit variable cost, using the production number you determined in (e).
   j) Project the number of helmets you anticipate selling the first month of operations. Set a unit selling price, and compute both the contribution margin per unit and the contribution margin ratio.
   k) Determine your break-even point in dollars and in units.
   l) Prepare projected operating budgets (sales, production, direct materials, direct labor, manufacturing overhead, selling and administrative expense, and income statement). You will need to make assumptions for each of the following:
   Direct materials budget: Quantity of direct materials required to produce one helmet; cost per unit of quantity; desired ending direct materials (assume none).
   Direct Labor budget: Direct labor time required per helmet; direct labor cost per hour.
   Budgeted income statement: Income tax expense is 45% of income from operations.
   m) Prepare a cash budget for the month. Assume the percentage of sales that will be collected from customers is 75%, and the percentage of direct materials that will be paid in the current month is 75%.
   n) Determine a relevant range of activity, using the number of helmets produced as your activity index. Recast your manufacturing overhead budget into a flexible monthly budget for two additional activity levels.
   o) Identify one potential cause of materials, direct labor, and manufacturing overhead variances for your product.
   p) Assume that you wish to purchase production equipment that costs $720,000. Determine the cash payback period, utilizing the monthly cash flow that you computed in part (m) multiplied by 12 months (for simplicity).
   q) Identify any nonfinancial factors that should be considered before commencing your business venture.

Herschel Candy Co. produces a single product: chocolate almond bar that sells for $0.40 per bar. Variable costs for each bar (sugar, chocolate, almonds, wrapper and labor) total $0.25. Total Mo. Fixed costs are $60,000. Last month, bar sales reached 1 million. Herschel’s President wants to increase company’s profitability by following options:
1) increase advertising
2) Increase quality of bar’s ingredients and simultaneously increase selling price
3) Increase selling price with no change in ingredients

1. a) Sales mgr. is confident intensive advertising campaign will double sales volume. If co.’s president goal is to increase this month’s profits by 50% over last month’s, what is max. amt. that can be spent on advertising that doubles sales volume?
   b) Assume company increases quality of ingredients, thus increasing variable costs to $.30 per bar. By how much must selling price per unit be increased to maintain same breakeven point in units?
   c) Assume next that company has decided to increase its selling price to $0.50 per bar with no change in advertising or ingredients. Compute sales volume in units that would be needed at new price for company to earn same profit as it earned last month.

Duif Company’s absorption costing income statement for the last year of operations is presented below:

Sales…………………………………………………$70,000
Less cost of goods sold:
Beginning inventory………………………………………. 0
Add cost of goods manufactured………………48,000
Goods available for sale………………………….48,000
Less ending inventory………………………………6,000
Cost of goods sold………………………………..42,000
Gross margin……………………………………….28,000
Less selling & admin. expenses………………..25,000
Net operating income…………………………..$ 3,000

Data on units produced and sold for the year are given below:
Units in beginning inventory……………………………..0
Units produced……………………………………….8,000
Units sold………………………………………………7,000

Fixed factory overhead totaled $16,000 for the year. This overhead was applied to products at a rate of $2 per unit. Variable selling and administrative expenses were $3 per unit sold.

Required: Prepare a new income statement for the year using variable costing. Comment on the differences between the absorption costing and the variable costing income statements.