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Variable Costing


QUESTION 1 (3 + 3 + 3 + 2 = 11 marks) Projected cost information for a toner cartridge product to be introduced by Goodfields Manufacturing is as follows: Expected variable unit costs: $ Direct materials 11.00 Direct labour 5.60 Selling expenses 2.00 Expected annual fixed costs: $ Rent of building 28 000 Supervisor’s salary 60 000 Maintenance contract 15 500 Administrative expenses 20 500 The product is to be sold for $40.00 per unit. REQUIRED: a) Compute the number of units that must be sold to breakeven. b) Compute the number of units that must be sold if administrative expenses rise to $35 000, selling expenses fall by 50c a unit and a target profit of $120 000 is required. c) Calculate the profit that would be earned if 8000 units of the new product were sold. Assume that the costs remain the same as in the original estimates. d) Explain why the salary of the factory supervisor is treated as a fixed cost of producing toner cartridge, but the wages of workers on the assembly line are treated as a variable cost.