Chapter 12, Problem 12.1ME

To determine

Cost Behaviour:

The cost behavior can be defined as the sensitivity of cost to changes in production level or the volume level changes. Some cost changes directly with the changes in the level of production, some cost do not change at all and some costs remain same within a relevant range and changes when the level of production moves out of relevant range.

Variable costs: The costs which change directly with the variations in the level of production are termed as variable costs.

Fixed costs: The costs which remain same even after variations in the level of output are termed as fixed costs.

Mixed costs: The mixed cost can be defined as the cost which has the element of both the variable cost and the fixed cost.

The total mixed cost is calculated as −

  $\text{Total mixed cost }\left(\text{at a level of units sold}\right)\text{ = Variable cost per unit X Total units sold + Fixed Cost }$

To compute: Total costs to be incurred for a week with 2,750 units of activity

Answer to Problem 12.1ME

Total costs to be incurred for a week with 2,750 units of activity = $ 115,000

Explanation of Solution

The above answer can be explained as −

Given,

• Fixed costs −
• Supervisor's salary = $ 1,000
• Factory Rent = $ 2,500
• Mixed costs −
• Utilities = $ 1,500 + $ 5.25 per unit
• Variable cost per unit −
• Manufacturing labor wages = $ 20
• Supplies used in production = $ 8.50
• Packaging cost = $ 2.25
• Warranty cost = $ 4

The total fixed cost is −

  $\begin{array}{l}\text{Total fixed costs = Supervisor’s salary + Factory Rent + Utilities}\hfill \\ \hfill \\ \text{Total fixed costs = \$ 1,000 + \$ 2,500 + \$ 1,500}\hfill \\ \hfill \\ \text{Total fixed costs = \$ 5,000}\hfill \end{array}$

Total variable cost will be calculated as −

  $\begin{array}{l}\text{Total variable cost per unit = }\left(\begin{array}{l}\text{Utilities + Manufacturing labor wages }\\ \text{+ Supplies used in production + Packaging cost + Warranty cost}\end{array}\right)\hfill \\ \text{Total variable cost per unit = \$ 5}\text{.25 + \$ 20 + \$ 8}\text{.50 + \$ 2}\text{.25 + \$ 4}\hfill \\ \text{Total variable cost per unit = \$ 40}\hfill \end{array}$

Now, total variable cost will be −

  $\begin{array}{l}\text{Total variable cost = Total variable cost per unit X Number of units produced}\hfill \\ \text{Total variable cost = \$ 40 X 2,750 units}\hfill \\ \text{Total variable cost = \$ 110,000}\hfill \end{array}$

Now, total cost will be calculated as −

  $\begin{array}{l}\text{Total cost = Total fixed cost + Total variable cost}\hfill \\ \text{Total cost = \$ 5,000 + \$ 110,000}\hfill \\ \text{Total cost = \$ 115,000}\hfill \end{array}$

Thus, the total costs to be incurred for a week with 2,750 units of activity has been computed.