Graham's Manufacturing Industries Case Study Solution

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Register to read the introduction… The variable cost is $1 per flange for materials, and $2 per flange ($20 per hour divided by 10 flanges per hour) for direct manufacturing labor.

2. The inventoriable (manufacturing) cost per unit for 5,000 flanges is $3 × 5,000 + $20,000 = $35,000. Average (unit) cost = $35,000 ÷ 5,000 units = $7 per unit.
This is below Fred’s selling price of $8.25 per flange. However, in order to make a profit, Graham’s Glassworks also needs to cover the period (non-manufacturing) costs of $10,000, or $10,000 ÷ 5,000 = $2 per unit.
Thus total costs, both inventoriable (manufacturing) and period (non-manufacturing), for the flanges is $7 + $2 = $9. Graham’s Glassworks cannot sell below Fred’s price of $8.25 and still make a profit on the flanges.

At Fred’s price of $8.25 per flange:
|Revenue |$8.25 |× |5,000 |= | $41,250 |
|Variable costs |$3.00 |× |5,000 |= | 15,000 |
|Fixed costs | | | | | 30,000 |
|Operating Loss | | | | | $ (3,750)
…show more content…
Service-sector companies provide services or intangible products to their customers—for example, legal advice or audits. Only manufacturing and merchandising companies have inventories of goods for sale.

2. Inventoriable costs are all costs of a product that are regarded as an asset when they are incurred and then become cost of goods sold when the product is sold. These costs for a manufacturing company are included in work-in-process and finished goods inventory (they are “inventoried”) to build up the costs of creating these assets. Period costs are all costs in the income statement other than cost of goods sold. These costs are treated as expenses of the period in which they are incurred because they are presumed not to benefit future periods (or because there is not sufficient evidence to conclude that such benefit exists). Expensing these costs immediately best matches expenses to revenues.

3. (a) Mineral water purchased for resale by Safeway—inventoriable cost of a merchandising company. It becomes part of cost of goods sold when the mineral water is

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