Q1CP - Horngren'S Financial And Managerial Accounting

Question

The Jacksonville Shirt Company makes two types of T-shirts: basic and custom. Basic shirts are plain shirts without any screen printing on them. Custom shirts are created using the basic shirts and then adding a custom screen printing design. 

The company buys cloth in various colors and then makes the basic shirts in two departments, Cutting and Sewing. The company uses a process costing system (weighted-average method) to determine the production cost of the basic shirts. In the Cutting Department, direct materials (cloth) are added at the beginning of the process and conversion costs are added evenly through the process. In the Sewing Department, no direct materials are added. The only additional material, thread, is considered an indirect material because it cannot be easily traced to the finished product. Conversion costs are added evenly throughout the process in the Sewing Department. The finished basic shirts are sold to retail stores or are sent to the Custom Design Department for custom screen printing. 

The Custom Design Department creates custom shirts by adding screen printing to the basic shirt. The department creates a design based on the customer’s request and then prints the design using up to four colors. Because these shirts have the custom printing added, which is unique for each order, the additional cost incurred is determined using job order costing, with each custom order considered a separate job. 

For March 2018, the Jacksonville Shirt Company compiled the following data for the Cutting and Sewing Departments:

Department Item Amount Units 

Cutting Beginning balance \( 0 0 shirts 

Started in March 1,200 shirts 

Direct materials added in March 1,920 

Conversion costs 1,320 

Completed and transferred to Sewing ??? 1,200 shirts 

Ending balance 0 0 shirts 

Sewing Beginning balance, transferred in, \)1,350; 

conversion costs, \(650 \) 2,000 500 shirts 

Transferred in from Cutting ??? ??? 

Conversion costs added in March 1,196 

Completed and transferred to Finished Goods ??? 1,000 shirts 

Ending balance, 60% complete ??? ??? 

For the same time period, the Jacksonville Shirt Company compiled the following data for the Custom Design Department: 

Job Quantity Design Fee Printing Status 

367 400 Yes 3 colors Complete 

368 150 No 2 colors Complete 

369 100 Yes 5 colors Complete 

370 500 Yes 4 colors Complete

The Jacksonville Shirt Company has previously determined that creating and programming the design cost \(80 per design. This is a one-time charge. If a customer places another order with the same design, the customer is not charged a second time. Additionally, the cost to print is \)0.20 per color per shirt. 

Requirements 

1. Complete a production cost report for the Cutting Department and the Sewing Department. What is the cost of one basic shirt? 

2. Determine the total cost and the average cost per shirt for jobs 367, 368, 369, and 370. If the company set the sales price at 200% of the total cost, determine the total sales price of each job. 

3. In addition to the custom jobs, the Jacksonville Shirt Company sold 1,000 basic shirts (assume the beginning balance in Finished Goods Inventory is sufficient to make these sales, and the unit cost of the basic shirts in Finished Goods Inventory is the same as the unit cost incurred this month). If the company set the sales price at 125% of the cost, determine the sales price per unit, total sales revenue, total cost of goods sold, and total gross profit for the basic shirts. 

4. Calculate the total revenue, total cost of goods sold, and total gross profit for all sales, basic and custom. 

5. Assume the company sold only basic shirts (no custom designs) and incurred fixed costs of \(700 per month. 

a. Calculate the contribution margin per unit, contribution margin ratio, required sales in units to break even, and required sales in dollars to break even. 

b. Determine the margin of safety in units and dollars. 

c. Graph Jacksonville Shirt Company’s CVP relationships. Show the breakeven point, the sales revenue line, the fixed cost line, the total cost line, the operating loss area, and the operating income area. 

d. Suppose the Jacksonville Shirt Company wants to earn an operating income of \)1,000 per month. Compute the required sales in units and dollars to achieve this profit goal. 

6. The Jacksonville Shirt Company is considering adding a new product line, a cloth shopping bag with custom screen printing that will be sold to grocery stores. If the current market price of cloth shopping bags is \(2.25 and the company desires a net profit of 60%, what is the target cost? The company estimates the full product cost of the cloth bags will be \)0.80. Should the company manufacture the cloth bags? Why or why not?

Step-by-Step Solution

Answer

The production cost report for the cutting department and sewing department is prepared. The total cost is computed as $5,640. The basic shirts’ sales revenue will be $5,000, the cost of goods sold will be $4,000, and the gross profit will be $1,000. The basic and custom shirts have a sales revenue will be $16,280, the cost of goods sold will be $9,640, and a gross profit will be $6,640. The contribution margin per unit is $1; the contribution margin ratio is 20%, the required sales in units are 700 shirts, and the required sales in dollars is $3,500. The margin of safety in units is 300 shirts and in dollars is $1,500. The target cost is $0.90; the company should manufacture the cloth bags.

Step 1: Preparation of production cost report for cutting department and the Sewing Department.

Raleigh Shirt Company
Production cost report – Cutting Department
The month ended March 31, 2018
UNITS	Whole Units	Equivalent units transferred in	Direct Materials	Conversion costs
Units to account for:
Beginning work-in-process	0
Started in Production	1,200
Total units to account for	1,200
Units accounted for:
Completed and transferred out	1,200	NA	1,200	1,200
Ending work-in-process	0	NA	0	0
Total units accounted for	1,200	NA	1,200	1,200
	Transferred in	Direct Materials ($)	Conversion costs ($)	Total costs
Costs
Costs to account for:
Beginning work-in-process	NA	0	0	0
Costs added during the period	NA	1,920	1,320	3,240
Total costs to account for	NA	1,920	1,320	3,240
Divided by: Total EUP	NA	1,200	1,200
Cost per equivalent unit	NA	1.60	1.10
Cost accounted for:
Completed and transferred out	NA	1,920	1,320	3,240
Ending work-in-progress	NA	0	0	0
Total costs accounted for	NA	1,920	1,320	3,240

Raleigh Shirt Company
Production cost report – Sewing Department
The month ended March 31, 2018
UNITS	Whole Units	Equivalent units transferred in	Direct Materials	Conversion costs
Units to account for:
Beginning work-in-process	500
Started in Production	1,200
Total units to account for	1,700
Units accounted for:
Completed and transferred out	1,000	1,000	NA	1,000
Ending work-in-process	700	700	NA	420
Total units accounted for	1,700	1,700	NA	1,420
	Transferred in ($)	Direct Materials ($)	Conversion costs ($)	Total costs ($)
Costs
Costs to account for:
Beginning work-in-process	1,350	NA	650	2,000
Costs added during the period	3,240	NA	1,196	4,436
Total costs to account for	4,590	NA	1,846	6,436
Divided by: Total EUP	1,700	NA	1,420
Cost per equivalent unit	2.70	NA	1.30	4.00
Cost accounted for:
Completed and transferred out	2,700	NA	1,300	4,000
Ending work-in-progress	1,890	NA	546	2,436
Total costs accounted for	4,590	NA	1,846	6,436

Step 2 Computation of total cost and the average cost per shirt

Job (custom shirts)	367	368	369	370	Total
The total cost of basic shirts	$1,600	$600	$400	$2,000
Design costs	80	0	80	80
Printing costs	240	60	100	400
Total cost of the order	$1,920	$660	$580	$2,480	$5,640
Average cost shirt	$4.80	$4.40	$5.80	$4.96

Step 3 Computation of gross profit for 1,100 basic shirts

1,000 Basic Shirts
Sales Price per unit (per basic shirt)	$5.00
Total sales revenue for 1,000 basic shirts	$5,000
Total cost of goods sold for 1,000 basic shirts	$4,000
Total gross profit for 1,000 basic shirts	$1,000

Step 4 Computation of gross total sales revenue, the total cost of goods sold, and gross profit from basic and custom sales

Basic and custom
Total sales revenue (5,000 + 11,280)	$16,280
Total cost of goods sold (4,000 + 5,640)	$9,640
Total gross profit from basic and custom shirts	$6,640

Step 5 Computation of contribution margin, contribution margin ratio, required sales in units to break even, and required sales in units (a)

$\begin{array}{c}\mathrm{Contribution} \mathrm{margin} \mathrm{per} \mathrm{unit}=\mathrm{Sales} \mathrm{price} \mathrm{per} \mathrm{unit}-\mathrm{Variable} \mathrm{cost} \mathrm{per} \mathrm{unit}\\ \mathbf{=}\mathbf{5}\mathbf{.}\mathbf{00}\mathbf{-}\mathbf{4}\mathbf{.}\mathbf{00}\\ \mathbf{=}\mathbf{\$}\mathbf{1}\mathbf{.}\mathbf{00}\end{array}$

$\begin{array}{c}\mathbf{Contribution}\mathbf{ }\mathbf{margin}\mathbf{ }\mathbf{ratio}\mathbf{=}\frac{\mathrm{Contribution} \mathrm{Margin}}{\mathrm{Net} \mathrm{sales} \mathrm{revenue}}\\ \mathbf{=}\frac{\mathbf{1}\mathbf{.}\mathbf{00}}{\mathbf{5}\mathbf{.}\mathbf{00}}\mathbf{\times }\mathbf{100}\\ =20\%\end{array}$

$\begin{array}{c}\mathbf{Required}\mathbf{ }\mathbf{sales}\mathbf{ }\mathbf{in}\mathbf{ }\mathbf{Units}\mathbf{=}\frac{\mathrm{Fixed} \mathrm{Costs}+\mathrm{Target} \mathrm{Profit}}{\mathrm{Contribution} \mathrm{Margin}}\\ \mathbf{=}\frac{700+0}{\mathbf{1}\mathbf{.}\mathbf{00}}\\ =700\mathrm{shirts}\end{array}$

$\begin{array}{c}\mathrm{Required} \mathrm{Sales} \mathrm{in} \mathrm{dollars}=\mathrm{Required} \mathrm{sales} \mathrm{in} \mathrm{Units}\times \mathrm{Sales} \mathrm{price}\\ =700\times 5\\ =\$3,500\end{array}$

Step 6 Computation of margin of safety in units and dollars (b)

$\begin{array}{c}\mathrm{Margin} \mathrm{of} \mathrm{safety} \mathrm{in} \mathrm{units}=\mathrm{Expected} \mathrm{sales}-\mathrm{Break} \mathrm{even} \mathrm{sales}\\ =1,000-700\\ =300\mathrm{shirts}\end{array}$

$\begin{array}{c}\mathrm{Margin} \mathrm{of} \mathrm{safety} \mathrm{in} \mathrm{dollars}=\mathrm{Margin} \mathrm{of} \mathrm{safety} \mathrm{in} \mathrm{units}\times \mathrm{Sales} \mathrm{price} \mathrm{per} \mathrm{unit}\\ \mathbf{=}\mathbf{300}\mathbf{\times }\mathbf{5}\mathbf{.}\mathbf{00}\\ =\$1,500\end{array}$

Step 7 Preparation of graph (c)

Step 8 Computation of required sales in units and dollars to achieve profit goals (d)

$\begin{array}{c}\mathbf{Required}\mathbf{ }\mathbf{sales}\mathbf{ }\mathbf{in}\mathbf{ }\mathbf{units}\mathbf{=}\frac{\mathrm{Fixed} \mathrm{costs}+\mathrm{Target} \mathrm{Profit}}{\mathrm{Contribution} \mathrm{margin}}\\ \mathbf{=}\frac{700+1,000}{\mathbf{1}\mathbf{.}\mathbf{00}}\\ \mathbf{=}\mathbf{1}\mathbf{,}\mathbf{700}\text{}\mathbf{shirts}\end{array}$

$\begin{array}{c}\mathrm{Required} \mathrm{Sales} \mathrm{in} \mathrm{dollars}=\mathrm{Required} \mathrm{Sales}\times \mathrm{Sales} \mathrm{price} \mathrm{per} \mathrm{unit}\\ \mathbf{=}\mathbf{1}\mathbf{,}\mathbf{700}\mathbf{\times }\mathbf{5}\mathbf{.}\mathbf{00}\\ =\$8,500\end{array}$

Step 9 Computation of target cost

$\begin{array}{c}\mathrm{Target} \mathrm{cost}=\mathrm{Target} \mathrm{sales}-\mathrm{Desired} \mathrm{profit} \mathrm{price}\\ \mathbf{=}\mathbf{2}\mathbf{.}\mathbf{25}\mathbf{-}(\mathbf{2}\mathbf{.}\mathbf{25}\mathbf{\times }\mathbf{0}\mathbf{.}\mathbf{60})\\ \mathbf{=}\mathbf{\$}\mathbf{0}\mathbf{.}\mathbf{90}\end{array}$

The company should manufacture cloth bags. The estimated full product cost of $0.80 per bag will be less than the target cost of the company, which is $0.90. So, the company will earn a profit that will be greater than the desired 60%.