Madison Electric Company uses a fossil fuel (coal) plant for generating electricity. The facility can generate 900 megawatts (million watts) per hour. The plant operates 600 hours during March. Electricity is used as it is generated; thus, there are no inventories at the beginning or end of the period. The March conversion and fuel costs are as follows:Conversion costs                                   $40,500,000Fuel                                                          10,800,000        Total                                               $51,300,000Madison also has a wind farm that can generate 100 megawatts per hour. The wind farm receives sufficient wind to run 300 hours for March. The March conversion costs for the wind farm (mostly depreciation) are as follows:              Conversion costs                           $2,700,000a. Determine the cost per megawatt hour (MWh) for the fossil fuel plant and the wind farm to identify the lowest cost facility in March.b. Why are equivalent units of production not needed in determining the cost per megawatt hour (MWh) for generating electricity?c. What advantage does the fossil fuel plant have over the wind farm?

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Asked Jan 21, 2020
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Madison Electric Company uses a fossil fuel (coal) plant for generating electricity. The facility can generate 900 megawatts (million watts) per hour. The plant operates 600 hours during March. Electricity is used as it is generated; thus, there are no inventories at the beginning or end of the period. The March conversion and fuel costs are as follows:
Conversion costs                                   $40,500,000
Fuel                                                          10,800,000
        Total                                               $51,300,000

Madison also has a wind farm that can generate 100 megawatts per hour. The wind farm receives sufficient wind to run 300 hours for March. The March conversion costs for the wind farm (mostly depreciation) are as follows:
              Conversion costs                           $2,700,000
a. Determine the cost per megawatt hour (MWh) for the fossil fuel plant and the wind farm to identify the lowest cost facility in March.
b. Why are equivalent units of production not needed in determining the cost per megawatt hour (MWh) for generating electricity?
c. What advantage does the fossil fuel plant have over the wind farm?

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Expert Answer

Step 1

(a)

Calculate the cost per megawatt hour for the fossil fuel plant and for wind farm of the Company ME as shown below:

Accounting homework question answer, step 1, image 1
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Step 2

(b)

Equivalent units for production are evaluated when there is opening or ending inventories that are partially completed to each conversion costs and materials. In this Company, no opening and...

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