Salvay Company is a small manufacturer that produces and sells one product for use in medical instruments. Demand is erratic and can vary widely from year to year. The financial managers at Salvay are planning for the coming year and have asked for your help in forecasting unit costs and gross margin.

Stacy Choo, the cost accountant at Salvay, provides you with information about the components of manufacturing costs along with specifying the behavior of the components. This information is summarized in the memo on the next page.

Stacy also tells you that the company has a zero-inventory policy and all projections are made under that assumption. Finally, she points out that capacity constraints require assuming a second shift for the year if annual production volume exceeds 600,000 units. 

The marketing manager tells you that the best estimate of the price of the product is $20 per unit. His best guess is that demand could be as low as 500,000 units or as high as 750,000 units. 

Required

Compute the cost per unit and the gross margin per unit assuming output and sales of

a. 500,000 units.

b. 750,000 units.

Transcribed Image Text:

To: Jorge Alcala, Controller From: Stacy Choo, Cost Accountant Date: November 3. Subject: Cost Information Projections As you requested, the following table summarizes our best estimates for manufacturing costs for the upcoming fiscal year. These estimates are valid for any reasonable range of production. Cost Behavior Cost Category Direct costs: Materials Labor Overhead: Indirect plant labor Indirect plant supplies Machine depreciation Plant depreciation Plant maintenance Salvay Company Memo: Plant supervision Plant utilities Semivariable Variable Variable Variable Fixed Fixed Step Step Step Property taxes on plant Fixed Cost Information If production volume is below 550,000 units, we can source all our materials from Bourke Supplies at $3.00 per unit. This is a negotiated price. For any production greater than this, we will have to pay the going market price of $4.80 per unit. $4.50 per unit. $2.25 per unit. $1.25 per unit. $218,000 per year. $102,000 per year. $105,000 per shift. $280,000 per shift. $210,000 for production up to 800,000 units; $350,000 (total) if production is over 800,000 units. $65,000 per year.