You are an eager and ambitious young graduate of the Reginal F. Lewis College of Business at Virginia State University with a new Accounting degree and a great life ahead of you. One of your closest friends is an inventor and an entrepreneur who wants to start a business selling a break-through new drywall screw that he has invented and that he believes works much better than the drywall screws currently on the market. He wants to start the business by opening a factory to produce the screws which can then be sold to either wholesalers or retailers who will then sell them to the general public. After searching all over creation for the right sized building in the perfect location to properly meet the needs of his target customers, he found that the ideal building in which to put up his factory was right here in Petersburg all along. To begin, he was able to purchase the building he needed outright for $730,000. Useful life of the building is 50 years and it is depreciated on a straight-line basis. Estimated salvage value is $30,000. Property taxes on the building each year are $5,500. There is a new machine that another fellow VSU grad has invented that takes the metal for the screws and molds them into their proper size and shape, and takes the plastic for the anchors and molds them into their proper size and shape; an assembly line is attached to the machine where workers put the screws and anchors into boxes. The finished product is a box of 32 drywall screws and their plastic anchors that work unlike any that have come before them. He purchased this machine outright for $175,000. The machine has a useful life of 25 years with no residual value and is depreciated on a straight-line basis. The machine can produce 10,750 boxes of screws and anchors per year. He is sure that he can sell every unit produced. It is determined that to produce the 32 screws in each box will require 80 ounces of metal which is the only material used to make the screws and to produce the 32 anchors in each box will take 40 ounces of plastic which is the only material used to make the anchors. The metal you need is produced by multiple suppliers and you've found one so far that will allow you to buy it at $1.45 per pound. The plastic used is also produced by multiple suppliers and you've found one so far that will allow you to buy it at $.20 per pound. It takes 12 minutes for the workers on the assembly line to box the screws and anchors because they are put in there in a way that prevents them from becoming disorderly. This is part of the quality aspect of the product. Assembly line workers are paid at a rate of $17.00 per hour. Your friend hired a Vice President (VP) who has a degree in Marketing from VSU. She did some market research and determined that in order to be competitive with your new product you are going to charge $24.00 per box of screws and anchors. The Vice President is paid $52,750 per year. He also hired a Chief Operating Officer who will be paid $52,750 per year. Your friend has also asked you to serve as a consultant to his company to make sure that the business gets off to a good start. Your fee has not yet been determined and is not part of this problem. So far, you have helped your friend determine that estimated total cost of variable overhead that will be incurred in the first year of operations is $7,525. You determined that direct labor hours will be the best way to allocate variable overhead, at least for this first year, and helped estimate that there will be 2,150 direct labor hours during the year. QUESTIONS It can be assumed here that 1 unit is 1 box of screws and anchors. 1) Please determine if each of the following is a Variable or a Fixed Cost: Metal: Variable Cost Plastic: Variable Cost Assembly Labor : Variable Cost Property Taxes: Fixed Cost Machine Depreciation: Fixed Cost COO Salary: Fixed Costs VP Salary: Fixed Costs 2) Using what you read in the Information section, please determine the following: 1) Direct Materials Cost per Box: 2) Direct Labor Cost per Box: 3) Variable Overhead Cost per Box: 4) Variable Cost per Box: 5) Contribution Margin per Box: 6) Total Fixed Costs: 7) Break-Even Point in Boxes: 6) Prepare a memo addressed to your friend/client explaining your options and your recommendation. Which solution did you recommend to your friend? Why did you choose this particular solution? This memo should be no more than one page long. 7) Assume that all of the information given about all of the variable costs in the Information section of this assignment represent Standard Costs of a Flexible Budget. Every unit that could have been produced is still assumed to have been sold. - If it turns out that metal can actually be bought for $1.50 per pound, but each box only requires 75 ounces or metal, what are the Direct Materials Price, Efficiency, and Total Variances? What do these variances tell you? What are some possible explanations of these variances? - If it turns out that workers are actually paid $15.00 per hour, but take 15 minutes to work on each box, what are the Direct Labor Price, Efficiency, and Total Variances? What do these variances tell you? What are some possible explanations of these variances?