2-28 (book/static) Question Help Gummy LandGummy Land Candies manufactures jaw-b
ID: 2330355 • Letter: 2
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2-28 (book/static)
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Gummy LandGummy Land Candies manufactures jaw-breaker candies in a fully automated process. The machine that produces candies was purchased recently and can make 5,000
per month. The machine costs $$6,500 and is depreciated using straight line depreciation over 10 years assuming zero residual value. Rent for the factory space and warehouse and other fixed manufacturing overhead costs total $$1,200 per month.
Gummy LandGummy Land currently makes and sells 3,900 jaw-breakers per month.
Gummy LandGummy Land buys just enough materials each month to make the jaw-breakers it needs to sell. Materials cost40 cents per jaw-breaker. Next year Gummy LandGummy Land
expects demand to increase by 100%. At this volume of materials purchased, it will get a 10% discount on price. Rent and other fixed manufacturing overhead costs will remain the same.
1.
What is Gummy LandGummy Land's current annual relevant range of output?
2.
What is Gummy LandGummy Land's
current annual fixed manufacturing cost within the relevant range? What is the annual variable manufacturing cost?
3.
What will Gummy LandGummy Land's
relevant range of output be next year? How if at all, will total annual fixed and variable manufacturing costs change next year? Assume that if it needs to Gummy LandGummy Land
could buy an identical machine at the same cost as the one it already has.
2-28 (book/static)
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Explanation / Answer
Depriciation on Machine
= ( Cost - Residual Value ) / Expected Life
= ( 6500 $ - 0 $ ) / 10 year
= 650 $ per Year
= 541.67 $ Per Month (i.e. 650 / 12 Month )
1. Gummy Land's current annual relevant range of output
As company is currently makes and sells 3,900 jaw-breakers per month,
The relevant Fix Cost at 3900 Units Level
= Depreciation + Rent and other fixed manufacturing overhead
= 541.67 + 1200
= 1741.67 $ Per Month
This Means Total Fix Cost is 1741.67 $ at Level of 3900 Units Per Month and will Remain same till the Level of 5000 Units Per Month as this is the Maximum Capacity of the Machine to Produce on Monthly Basis.
Thus current relevant range of output is 3900 Units to 5000 Units per Month.
or
46800 Units to 60000 Units Annual.
Beyond 5000 Units per month company will have to engage another Machine to produce, which will increase the fix cost for Depreciation of that new Machine.
However Variable cost will not change till 7800 Units (i.e. 3900 x 2 )
ASSUMPTION - In absence of Information It is assumed that 3900 Units are minimum Production Required for the current Fix Cost and Variable Costs. Below 3900 Units Fix Cost may be Saved while on other Hand Variable Cost may be increased.
2. Gummy Land's current annual fixed manufacturing cost within the relevant range
= 1741.67 $ Per Month ( as calculated Above )
Gummy Land's current annual variable manufacturing cost
= No. Of Units Per Month x Variable Cost Per Unit X 12 Months
= 3900 X 0.40 $ X 12 Months
= 18720 $ Annual
3 . Gummy Land's relevant range of output be next year
Demand Next Year
= 3900 Units x 2 ( expects demand to increase by 100%. )
= 7800 Units
As Gummy Land Can not produce more than 5000 Units per month without Installing Another Identicle Machine. Thus it has to Install another Machine in order to Meet the Demand, Which will Increase the Fix Cost.
Total Capacity With Two Machines
= 5000 Units X 2
= 10000 Units Per Month
Thus relevant range of output next Year is 5001 Units to 10000 Units Per Month.
Means for Fixed Cost will remain same for 5001 Units per Months to 10000 Units Per Month.
However Variable Cost will Change at the Level of 7800 Units Per Month as there is Additional Discount of 10 % at this Quantity Level.
THUS THE OVERALL RELEVANT RANGE WILL BE
1. 5001 UNITS TO 7800 UNITS PER MONTH
2. 7800 UNITS TO 10000 UNITS PER MONTH.
Total annual fixed and variable manufacturing costs next year
Annual Fixed Cost
= Depreciation ( 650 $ x 2 ) + Other Fixed Overhead (1200 $ x 12 Months)
= 1300 $ + 14400 $
= 15700 $
Annual Variable Cost
= 7800 units X 12 Months X 0.36 $ per Unit (i.e. 0.40 $ Per Unit - 10 % Discount )
= 33696 $
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