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ETech Company was organized on January 1, 2017 to produce and sell a revolutionary smart watch. At the beginning of its second year (2018) finished goods inventory was 2,000 watches. During 2018 ETech accountant resigned and the accounting was done by an accounting student who worked part-time for the company. The income statement below was prepared by the accounting student.

ETech Company

Income Statement

As of December 31, 2018

Revenues:

Sales revenue (38,000 watches). $1,140,000

Royalty revenue. 500

Gain on sale of trading investment 7,000

Deferred rent revenue .. 3,500

Interest payable... 3,700

Total revenues .. $1,154,700

Operating expenses:

Cost of goods manufactured. .. $1,113,000

Selling and distribution expense.. 195,000

General and administrative expense 95,000

Restructuring costs. 25,000

Short-term investments 17,000

Interest expense. .. 5,000

Dividend paid.. 1,000

Total operating expenses 1,451,000

Net loss ($296,300)

ETech Company

Schedule of Cost of Goods Manufactured

As of December 31, 2018

Purchase of direct materials. 360,000

Direct manufacturing labor costs 79,000

Indirect Manufacturing Overhead:

Factory maintenance.... $35,000

Factory insurance . .. 3,000 Indirect manufacturing labor costs... 105,000

Rent expense 84,000

Utilities expense 30,000

Research & development expense... 15,000

Prepaid factory insurance. 2,000

Factory equipment ... 500,000

Accumulated depreciation - factory equipment . (100,000)

Total indirect manufacturing overhead 674,000

Cost of goods manufactured .. $1,113,000

Additional information about the companys activities during the year is as follows:

a. In 2018 the company produced 40,000 watches.

b. Inventories at the beginning and end of the year were as follows:

January1, 2018 December 31, 2018

Direct materials $8,000 $10,000

Work in process .. $25,200 49,000

Finished goods $37,800 ?

c. Seventy five percent (75%) of rent expense relates to manufacturing, 15% to general and administrative expense and 10% to selling and distribution expense.

Also, 90% of utilities expense relates to manufacturing, 6% to general and administrative expense and 4% to selling and distribution expense.

d. Factory equipment was purchased January 2, 2017 and is estimated to have a useful life of 10 years with a $5,000 salvage value remaining at the end of its useful life. The company uses the double-declining-balance method of depreciation. The accumulated depreciation of $100,000 reported in the Schedule of Cost of Goods Manufactured resulted from 2017 factory equipment depreciation. No depreciation was charged for 2018.

e. The companys tax rate is 21 %.

The companys CEO is concerned about the large net loss and hires your accounting firm to review the above financial statements.

Required:

Calculate the cost of producing one watch (show calculation)

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