Question

Bill Pope has developed a new device that is so exciting he is considering quitting his job in order to produce and market it on a large-scale basis. Bill will rent a garage for $300 per month for production purposes. Utilities will cost $40 per month. Bill has already taken an industrial design course at the local community college to helo prepare for this venture. The course cost $300. Bill will rent production equipment at a monthly cost of $800. He estimates the material cost per unit will be $5, and the labor cost will be $3. He will hire workers and spend his time promoting the product. To do this he will quit his job which pays $3,000 per month. Advertising and promotion will cost $900 per month.Required: Complete the chart by placing an "X" under each heading that helos to identify the cost involved. There can be "Xs" placed under more than one heading for a simple cost., e.g., a cost might be a sunk cost, an overhead cost and a product cost; there would be an "X" placed under each of these headings opposite the cost.

Answer 1

Answer:

Costs of: Opportunity  Sunk Variable Fixed MOH Product Selling Differential

Garage rent  (Fixed)........................................X

Utilities  (Fixed).................................................X

Cost of the industrial design course  (Sunk) ... ''the cost has been spent''

Equipment rented .(Fixed)...............................X

Material cost  (Variable)...................X

Labor cost  (Variable).......................X

Present salary  (Opportunity cost / Differential Cost)..'He wont earn anymore'

Advertising  (Fixed and Selling Costs)............X...................................X

Explanation:

Costs of: Opportunity  Sunk Variable Fixed MOH Product Selling Differential

Garage rent  (Fixed)........................................X

Utilities  (Fixed).................................................X

Cost of the industrial design course  (Sunk) ... ''the cost has been spent''

Equipment rented .(Fixed)...............................X

Material cost  (Variable)...................X

Labor cost  (Variable).......................X

Present salary  (Opportunity cost / Differential Cost)..'He wont earn anymore'

Advertising  (Fixed and Selling Costs)............X...................................X

1. Garage rent is fixed Manufacturing Overhead because he will pay a fixed rent amount every month.

2. Utilities is fixed Manufacturing Overhead because he will pay a fixed amount every month.

3. Cost of the industrial design course  is Sunk because the cost has been spent already

4. Equipment rented  is fixed Manufacturing Overhead because he will pay a fixed amount every month.

5. Material cost  is variable because it will depend on how much produced every month.

6. Labor cost  is variable because it will depend on how much produced every month.

7. Present salary  is an Opportunity cost because wont earn salary anymore when he starts the business; this is also differential because it is the difference between the cost of the two alternative decisions

Advertising  is a fixed Selling costs because he will pay a fixed amount every month and it is related to sales not production.