Question

Brief Exercise 3-25 Creating and Using a Cost Formula Kleenaire Motors manufactures hybrid sports utlity vehicles (SUVs). Kleenaire incurs monthly dep ciation costs of $10,000,000 on its highly automated plant machinery and warehousing facility. Also, each SUV requires materials and manufacturing overhead resources. On average, the company uses 75,000,000 pounds of steel to manufacture 50,000 SUVs per month. Each pound of steel costs $0.20. In addition, manufacturing overhead resources are driven by machine hours. On average, the company incurs $200,000,000 ofvariable manufacturingoverhead resources to produce 50,000 SUVsper month. OBJEC Examp Required: 1. Create a formula for the monthly cost of SUVs for Kleenaire. 2. If Kleenaire expects to manufacture 55,000 SUVs next month, what is the expected fixed cost (assuming that 55,000 units is within the company's current relevant range)? Total variable cost? Total manufacturing cost (i.c, both fixed and variable)?

Answer 1

Answer 1: Fixed Costs: Monthly Fixed costs Depreciation cost $10,000,000 Variable costs: For 50,000 SUVS: Steel cost 75,000,000 pounds * $0.20 $15,000,000 Variable manufacturing overhead = $200,000,000 Total variable cost for 50,000 SUVS = Steel cost Variable manufacturing overhead = $15,000,000+ $200,000,000 $215,000,000 Variable cost per SUV $215,000,000 50,000 $4,300 Formula for monthly manufacturing cost of SUVs Fixed cost Variable cost per SUV = $10,000,000 $4,300 * Number of SUVS Formula for monthly manufacturing cost of SUVS Fixed cost Variable cost per SUV* Number of SUVS Total cost of SUVS $10,000,000 $4,300 * Number of SUVS Answer 2: Expected number of SUVS to be produced next month -55,000 Formula for monthly manufacturing cost of SUVS = Fixed cost + Variable cost per SUV = $10,000,000 $4,300 * Number of SUVS Fixed cost $10,000,000 Total Variable cost $4,300 * Number of SUVS = $4,300 * 55,000 $236,500,000 Total manufacturing cost $10,000,000 + $236,500,000 $246,500,000 Нence: Fixed cost - $10,000,000 Total Variable cost =$236,500,000 Total manufacturing cost = $246,500,000