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Excel Analytics $2-74$: Basic Cost Behaviors: Visualization

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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.

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

Stacey 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.

Salvay Company Memo:

To: Jorge Alcala, Controller

From: Stacey 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 Category Cost Behavior Cost Information

Direct costs:

Materials Semi$-$variable If production volume is below $550,000$ units, we can source all our materials from Bourke Supplies at $$3\mathrm{.}00$ per unit. This is a negotiated price. For any production greater than this, we will have to pay the going market price of $$4\mathrm{.}80$ per unit.

Labor Variable $$4\mathrm{.}50$ per unit.

Overhead:

Indirect plant labor Variable $$2\mathrm{.}25$ per unit.

Indirect plant supplies Variable $$1\mathrm{.}25$ per unit.

Machine depreciation Fixed $$218,000$ per year.

Plant depreciation Fixed $$102,000$ per year.

Plant maintenance Step $$105,000$ per shift.

Plant supervision Step $$280,000$ per shift.

Plant utilities Step $$210,000$ for production up to $800,000$ units;

$$350,000($total$)$ if production is over $800,000$ units.

Property taxes on plant Fixed $$65,000$ per year.

Stacey Choo would like you to prepare a presentation for the CFO and Controller at Salvay discussing the estimated gross margins. They are especially interested in the effect of the individual cost items on the gross margins. Stacey also mentions that both managers like to see visual support for any conclusions.

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