Question

10. Just Burn It! Manufactures blank CDs. The company incurs $22,000 in monthly depreciation costs on its manufacturing equipment as well as monthly advertising costs of the $2,000 to place ads in newspapers and on the radio. Each CD requires materials and manufacturing overhead resources. On average the company uses 26,000 pounds of material to manufacture 12,000 CDs per month. Each pound of material costs $2.50. The manufacturing overhead is driven by machine hours and on average company incurs $30,000 in manufacturing overhead to produce 12,000 CDs per month. Required: 1.) Create a formula for the monthly cost of the CDs for Just Burn It! 2.) If the company plans to manufacture 15,000 CDs next month, what is the expected fixed cost? What is the total variable cost? What is the total cost?

Answer 1

1. Formula for monthly cost = ($7.9167 * No. of units manufactured) + $24,000

Variable Cost per unit = $ 7.9167

Fixed Cost = $24,000

The detailed working is below

MONTHLY COST OF CDs FOR JUST BURN IT 26,000 * $2.5 VARIABLE COST (12000 units) Material Add Manufacturing overhead Total Variable Cost $ $ $ 65,000 (12,000 units require 26,000 pounds of material) 30,000 95,000 Variable Cost per unit ($95,000/12,000) 7.9167 Variable Cost per unit =( Material + Manufacturing Overhead)/ No. of units NOTE: FIXED COST Depriciation Add Advertising Cost Total Fixed Cost $ $ $ 22,000 2,000 24,000 TOTAL COST Total Variable Cost Add Total Fixed Cost Total Cost $ $ $ 95,000 24,000 119,000 FORMULA (Variable Cost per unit * No of units manufactured) + Fixed Cost ($7.9167 * No of units) + Fixed Cost

2. Fixed Cost, Variable Cost and Total cost for 15,000 units

2.COST OF CDS FOR JUST BURN IT (15,000 units) $ VARIABLE COST (15000 units) Variable Cost per unit as calculated in part 1 No. of units to be manufactured Total Variable Cost 15,000 * 7.9167 7.9167 15,000 $118,750 rounded off to nearest whole number FIXED COST Depriciation Add Advertising Cost Total Expected Fixed Cost $ $ $ 22,000 2,000 24,000 NOTE: Fixed Cost does not change with the change in the number of units manufactured Hence it will remain same for both 12,000 and 15,000 units TOTAL COST Total Variable Cost Add Total Fixed Cost Total Cost $ 118,750 $ 24,000 $ 142,750