The only selling expenses were a commission of 2 per unit so

The only selling expenses were a commission of $2 per unit sold and advertising totalling $100,000. Administrative expenses, all fixed, equalled $300,000. There were no beginning or ending finished goods inventories. There were no beginning or ending work-in-process inventories.

Required:

1. Calculate the product cost for one tent.

Calculate the total product cost for last year (per tent).

2. Prepare an income statement for external users.

Did you need to prepare a supporting statement of cost of goods manufactured? Explain.

3. Conceptual Connection: Suppose 200,000 tents were produced (and 200,000 sold) but that the company had a beginning finished goods inventory of 10,000 tents produced in the prior year at a cost of $40 per unit. The company follows a first-in, first-out policy for its inventory (meaning that the units produced first are sold first for purposes of cost flow). What effect does this have on the income statement?

4.  Show new income statement regarding question above

Solution

Infinity Inc.

Statement of Cost and income

Direct materials (200,000 x 18) 3,600,000

Direct labor (200,000 x 12) 2,400,000

Prime cost 6,000,000

Manufacturing overheads (200,000 x 16) 3,200,000

Works/Factory cost 9,200,000

+ Administrative expenses 300,000

Cost of production 9,500,000

+ Selling commission (2,00,000 x 2) 400,000

+ Advertising 100,000

Total cost 10,000,000

+ Profit 2,000,000

Sales (200,000 x 60) 12,000,000

Total cost of manufacturing 200,000 tents = $10,000,000

Hence, cost per tent = 10,000,000

200,000

= $50

If there was a begining inventory of 10,000 tents

Value of closing inventory of tents = 9,500,000 x 10,000

200,000

= $475,000

In such a case, cost of production won\'t change but total cost and profits will be affected as under:

Statement of cost and income

Cost of production 9,500,000

+ Opening inventory of tents (10,000 x 40) 400,000

- Closing inventory of tents - 475,000

Cost of goods sold 9,425,000

+ Selling commission 400,000

+ Advertising 100,000

Total cost 9,925,000

+ Profit 2,075,000

Sales 12,000,000

Hence, if there is a begining inventory of 10,000 tents costing $40 each, it will increase the profits of the business by $75,000.