Billy Davidson operates Billy鈥檚 Worm Farm in Mississippi. Davidson raises worms for fishing. He sells a box of 20 worms for \(12.60. Davidson has invested \)400,000 in the worm farm. He had hoped to earn a 24% annual rate of return (net income divided by total assets), which works out to a 2% monthly return on his investment. After looking at the farm鈥檚 bank balance, Davidson fears he is not achieving this return. To evaluate the farm鈥檚 performance, he prepared the following production cost report. The Finished Goods Inventory is zero because the worms ship out as soon as they reach the required size. Monthly operating expenses total \(2,000 (in addition to the costs below).
BILLY鈥橲 WORM FARM Production cost report 鈥� BROODING DEPARTMENT Month Ended June 30, 2018
|
|
| Equivalent units
|
|
Units | Physical units | Transferred in | Direct materials | Conversion costs | |
Units to account for: | | | | | |
Beginning WIP | 9,000 | | | | |
Transferred in | 21,000 | | | | |
Total units to account for | 30,000 | | | | |
| | | | | |
Units accounted for: | | | | | |
Completed and transferred out | 20,000 | 20,000 | 20,000 | 20,000 | |
Ending WIP | 10,000 | 10,000 | 6,000 | 3,600 |
|
Total units accounted for | 30,000 | 30,000 | 26,000 | 23,600 | |
| | | | | |
COSTS | | Transferred in | Direct materials | Conversion costs | Total costs |
Cost to account for: | | | | | |
Beginning WIP | | \)21,000 | \(39,940 | \)5,020 | \(65,960 |
Cost added during period | | 46,200 | 152,460 | 56,340 | 255,000 |
Total cost to account for | | 67,200 | 192,400 | 61,360 | 320,960 |
Divided by total EUP | | 30,000 | 26,000 | 23,600 |
|
Cost per equivalent units | | \)2.24 | \(7.40 | \)2.60 | |
| | | | | |
Costs accounted for: | | | | | |
Completed and transferred out | | \(44,800 | \)148,000 | \(52,000 | \)244,800 |
Ending WIP | | 22,400 | 44,400 | 9,360 | 76,160 |
Total costs accounted for | | \(67,200 | \)192,400 | \(61,360 | \)320,960 |
Requirements
Billy Davidson has the following questions about the farm鈥檚 performance during June.
1. What is the cost per box of worms sold? (Hint: This is the unit cost of the boxes completed and shipped out of brooding.)
2. What is the gross profit per box?
3. How much operating income did Billy鈥檚 Worm Farm make in June?
4. What is the return on Davidson鈥檚 investment of \(400,000 for the month of
June? (Compute this as June鈥檚 operating income divided by Davidson鈥檚 \)400,000
investment, expressed as a percentage.)
5. What monthly operating income would provide a 2% monthly rate of return?
What sales price per box would Billy鈥檚 Worm Farm have had to charge in June to
achieve a 2% monthly rate of return?
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