Black Manufacturing Company
Black Manufacturing produced a single product called the Great Beast. During the past three weeks, Lee High, the new cost accountant, had observed that production efficiency and input prices were constant but that output varied considerably. These three weeks were thought of as typical by sales representative, who said that they could be taken as average. Production costs were accumulated and accounted for under several different groups listed below.
125…show more content… He also realized that cost of goods sold per unit seemed to fall as output rose:
When sales were 400, then cost of goods sold per unit was $4.58.
When sales were 500, then cost of goods sold per unit was $4.22.
When sales were 600, then cost of goods sold per unit was $3.98.
Lee wasn’t sure why cost of goods sold per unit should fall, because, after all, the efficiency and input prices had remained the same. He reasoned that there was something odd about the data and decided it would be good to work with some average. Since the three weeks for which Lee had data were thought to be typical, he decided that some “standardized cost information” based on sales of 500 units per week would be very helpful. He derived the following chart:
Useful Data on Great Beast
Average variable cost per unit produced
Average fixed cost per unit produced
Average fixed administrative and selling cost per unit
Commission per unit sold
Added amount for rounding error and some “funny” results in data
The following should be kept in mind when selling Great Breast:
1. It costs us $6.60 to deliver a unit of Great Beast, so we make only 40 cents per unit at
$7.00 selling price.
2. Decision rule #1 (for sales representative on the road): Never sell Great Beast for less than $6.60 plus a profit margin because at $6.60 we