ToysRNZ produces and sells plastic lightsabres for $20 each. Their variable cost is $16 each. Relevant fixed costs are $120,000. ToysRNZ sells all lightsabres it produces, there is no inventory of unsold lightsabres. The relevant range of production is between 5,000 and 40,000 lightsabres. All information in this question relates to a single fiscal year. Because of the new Star Wars release, demand increases by 12,500 lightsabres. This will push production significantly beyond the relevant range. To satisfy the higher demand, ToysRNZ can rent additional production capacity. In order to maintain a profit of $30,000, what is the maximum amount that ToysRNZ should pay for the additional capacity?
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
ToysRNZ produces and sells plastic lightsabres for $20 each. Their variable cost is $16 each. Relevant fixed costs are $120,000. ToysRNZ sells all lightsabres it produces, there is no inventory of unsold lightsabres. The relevant range of production is between 5,000 and 40,000 lightsabres. All information in this question relates to a single fiscal year.
Because of the new Star Wars release, demand increases by 12,500 lightsabres. This will push production significantly beyond the relevant range. To satisfy the higher demand, ToysRNZ can rent additional production capacity. In order to maintain a profit of $30,000, what is the maximum amount that ToysRNZ should pay for the additional capacity?
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