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Anand Limited manufactures drones for industrial use. Most of their costs are either true variable...

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Accounting

Anand Limited manufactures drones for industrial use. Most of their costs are either true variable costs or fixed costs. However, an account analysis shows the following items are mixed costs.

Account Analysis 2016 Total

Cost

Production supervision 80% fixed $ 150,000

Utilities 20% fixed $ 60,000

Sales staff wages* 70% fixed $ 200,000

Quality control inspections** 90% fixed $ 40,000

*The 30% variable portion relates to sales commissions based on total sales.

**50% of manufactured units are inspected each year.

In 2016 Anand Limited produced and sold 500 drones at $2,000 each.

Required:

1. Management expects to sell 700 drones in 2017, does not anticipate any cost increases due to inflation, and plans to maintain the sales price of $2,000 per drone. Estimate total costs for each of the mixed cost items above. Be sure to show the variable and fixed components of the total cost.

2. Assuming direct material costs are $500 per unit and direct labour costs are $250 per unit, calculate the expected contribution margin for 2017 based on sales of 700 drones.

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