Question 2
Hydropure Ltd commenced operations at the beginning of thecurrent year. One of the company’s products, an alkalineantioxidant water filter, sells for $299 per unit. Informationrelated to the current year’s activities are as follows:
$
Variable costs per unit:
Direct materials 40
Direct labour 74
Manufacturing overhead 96
Annual fixed costs:
Manufacturing overhead 700,000
Selling and administrative 880,000
Production and sales activity:
Production (units) 25,000
Sales (units) 20,000
Hydropure Ltd carries its finished goods inventory at theaverage unit cost of production. There was no work in process atthe yearend.
Required:
(a) Determine the cost of the yearend finished goods inventory.
(b) Calculate Hydropure Ltd’s net profit for the current year.Ignore taxation.
(c) If the next year’s production decreases to 24,000 units andthe general cost behaviour and patterns do not change, what is thelikely effect on:
(i) Direct labour cost of $74 per unit? Explain why.
(ii) Fixed manufacturing overhead cost of $700,000? Explain why.
(iii) Fixed selling and administrative cost of $880,000? Explainwhy.
(iv) Average unit cost of production? Explain why.
