The Iron Pit Foundry manufactures dumbbells for gyms. The Iron Pit's owners, Matt Andrews and Doug Ballard, provide you with the following information regarding raw materials (cast iron & steel):
Raw materials beginning balance................... $80,000
Raw materials ending balance..................... $150,000
Matt and Doug also inform you that materials issued to production during the year equaled 80% of the materials purchased during the year. You gather the following additional information:
WIP beginning balance.................................................................... $200,000
WIP ending balance .......................................................................$150,000
Finished goods beginning balance ......................................................$125,000
Total manufacturing costs charged to production
= direct materials issued to production + direct labor
+ manufacturing overhead ...............................................................$800,000
Manufacturing overhead ......................................................150% of direct labor
Revenues for the year totaled $1,500,000, and The Iron Pit's gross margin percentage (i.e., gross margin as a percentage of revenues) was 40%. Matt and Doug paid sales commissions equal to 3% of revenues and shipping costs (from the foundry to the gyms) equaled 2% of revenues. Finally, Matt and Doug inform you that they spent $60,000 on advertising during the year and that fixed administration costs were $140,000 for the year.
Required:
a. Calculate materials purchases for the year.
b. Calculate the direct materials issued to production.
c. Calculate direct labor cost.
d. Calculate overhead costs.
e. Calculate prime costs.
f. Calculate conversion costs.
g. Calculate cost of goods manufactured.
h. Calculate the ending balance in the finished goods account.
i. Calculate cost of goods sold.
j. Prepare an income statement for The Iron Pit for the year.
k. Suppose The Iron Pit decides to start producing barbells in addition to dumbbells.
The yearly labor costs associated with producing barbells would equal $152,000 and the firm's overall expenditures on manufacturing overhead would increase by $138,000 per year. Matt and Doug would allocate overhead costs to dumbbells and barbells using direct labor cost as the allocation basis. If the Iron Pit produces barbells, by how much would the gross margin (in $) from dumbbells increase? (assume materials and labor costs have not changed in several years). What can you conclude about why firms frequently offer multiple products?