Comprehensive review problem During their senior year at Camden College, two business students, Trey Lancaster and Alisha Wright, began a part-time business making personal computers. They bought the various components from a local supplier and assembled the machines in the basement of a friend’s house. Their only cost was

$360 for parts; they sold each computer for $630. They were able to make three machines per week and to sell them to fellow students. The activity was appropriately called Lancaster Wright Computers

(LWC). The product quality was good, and as graduation approached, orders were coming in much faster than LWC could fill them.

A national CPA firm made Ms. Wright an attractive offer of employment, and a large electronic company was ready to hire Mr. Lancaster. Students and faculty at Camden College, however, encouraged the two to make LWC a full-time venture. The college administration had decided to require all students in the schools of business and engineering to buy their own computers beginning in the coming fall term.

It was believed that the quality and price of the LWC machines would attract the college bookstore to sign a contract to buy a minimum of 1,000 units the first year for $540 each. The bookstore sales were likely to reach 2,000 units per year, but the manager would not make an initial commitment beyond 1,000.

The prospect of $540,000 in annual sales for LWC caused the two young entrepreneurs to wonder about the wisdom of accepting their job offers. Before making a decision, they decided to investigate the implications of making LWC a full-time operation. Their study provided the following information relating to the production of their computers.

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c. Cost per computer with 2,000 units produced: $409.80 Components from wholesaler $ 360 per computer Assembly labor 15 per hour Manufacturing space rent 2,250 per month Utilities 450 per month Janitorial services 360 per month Depreciation of equipment 2,880 per year Labor 2 hours per computer The two owners expected to devote their time to the sales and administrative aspects of the business.

Required

a. Classify each cost item into the categories of direct materials, direct labor, and manufacturing overhead.

b. Classify each cost item as either variable or fixed.

c. What is the cost per computer if LWC produces 1,000 units per year? What is the cost per unit if LWC produces 2,000 units per year?

d. If the job offers for Mr. Lancaster and Ms. Wright totaled $96,000, would you recommend that they accept the offers or proceed with plans to make LWC a full-time venture?