Strabone, Inc. produces a single product which is sold to fabricators of lactronic equipment. Since the...

   

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Strabone, Inc. produces a single product which is sold to fabricators of lactronic equipment. Since the company is reiatively small, it does not utilize involved cost ac- counting techniques in determir ing inventory values Direct materials and direct labor are iden- kiied with specific lots of product. Factory overhead rates are not used, the company waits until the end of the accounting period for which statements are required and then assigns overhead to Inventory and to cost of goods sold on a unit of production basis. During 19-, the company produced its regular year's output by December 15, at which time it planned to shut down for the last two weeks of the year, reopening after the new year. As of December 15, the following income statement, which included all 19-- costs, was prepared: Strabone, Inc. Income Statement For the Year Ended December 31, 19- Sales (20.000 units) Cost of goods sold Inventory, January 1. 19-- Production costs for an output of 22,000 units. Direct materials Direct labor Factory overhead. $100.000 -0- $13,500 30,500 35,200 Total Inventory, December 31, 19-- (2,000 units) $79.200 8.220 70.980 $ 29,020 10,000 $ 19,020 Gross profit. Marketing and administrative expenses (all fixed) Income (before income taxj.. On December 18, 19--, a department of the United States government placed an order with the company for 4,000 units of product. The company accepted the order, which stipulated that delivery be made by December 31, 19-- and that the company should be permitted to earn a gross profit on the order calculated at 20% of selling price. The company called back its produc- tion personnel and, by the end of the year, completed 2,000 units which, with the inventory, com- prised the government's total order. During this period, it expended additional costs as follows: direct materials, $1,300; direct labor. $2,800; and factory overhead, $800. in accordance with the terms of the order, the government was billed at a price of $4.85 per unit. The government auditor who reviewed the company's invoice complained that at this price the company would earn a profit of 32.4% on sales and that the unit sales price should be $4.10 in order to comply with the terms of the order. Required: (1) Calculations to show (a) the method used by the company to arrive at its price of $4.85 and (b) the method used by the government to reach a price of $4.10. (2) A critical evaluation of the two pricing methods. Could acceptable accounting procedures be utlized to arrive at a third price for the order? Explain this third method and Indicate which of the three methods is preferable in this instance. Strabone, Inc. produces a single product which is sold to fabricators of lactronic equipment. Since the company is reiatively small, it does not utilize involved cost ac- counting techniques in determir ing inventory values Direct materials and direct labor are iden- kiied with specific lots of product. Factory overhead rates are not used, the company waits until the end of the accounting period for which statements are required and then assigns overhead to Inventory and to cost of goods sold on a unit of production basis. During 19-, the company produced its regular year's output by December 15, at which time it planned to shut down for the last two weeks of the year, reopening after the new year. As of December 15, the following income statement, which included all 19-- costs, was prepared: Strabone, Inc. Income Statement For the Year Ended December 31, 19- Sales (20.000 units) Cost of goods sold Inventory, January 1. 19-- Production costs for an output of 22,000 units. Direct materials Direct labor Factory overhead. $100.000 -0- $13,500 30,500 35,200 Total Inventory, December 31, 19-- (2,000 units) $79.200 8.220 70.980 $ 29,020 10,000 $ 19,020 Gross profit. Marketing and administrative expenses (all fixed) Income (before income taxj.. On December 18, 19--, a department of the United States government placed an order with the company for 4,000 units of product. The company accepted the order, which stipulated that delivery be made by December 31, 19-- and that the company should be permitted to earn a gross profit on the order calculated at 20% of selling price. The company called back its produc- tion personnel and, by the end of the year, completed 2,000 units which, with the inventory, com- prised the government's total order. During this period, it expended additional costs as follows: direct materials, $1,300; direct labor. $2,800; and factory overhead, $800. in accordance with the terms of the order, the government was billed at a price of $4.85 per unit. The government auditor who reviewed the company's invoice complained that at this price the company would earn a profit of 32.4% on sales and that the unit sales price should be $4.10 in order to comply with the terms of the order. Required: (1) Calculations to show (a) the method used by the company to arrive at its price of $4.85 and (b) the method used by the government to reach a price of $4.10. (2) A critical evaluation of the two pricing methods. Could acceptable accounting procedures be utlized to arrive at a third price for the order? Explain this third method and Indicate which of the three methods is preferable in this instance.

Answer rating: 100% (QA)

1 Government calculation Per unit cost Production at 22000 units Direct Materials 13500 22000 0614 ... View the full answer