PROBLEM 3-18. You Get What You Measure! The Plastic Glow Company makes glow stic
ID: 2587002 • Letter: P
Question
PROBLEM 3-18. You Get What You Measure! The Plastic Glow Company makes glow sticks. It uses a process costing system and has had a just-in-time inventory policy. The plant has a capacity to produce 500,000,000 units a year but currently operates at 300,000,000 units per year. Direct material and direct labor costs are variable, and manufacturing overhead is primarily fixed. Production costs for 2017 are as follows:
Number of units produced and sold 300,000,000
Direct materials $ 15,000,000
Direct labor 30,000,000
Manufacturing overhead 105,000,000
Total costs $150,000,000
Equivalent cost per unit $0.50
Jim Taylor, the president, receives a bonus each year based on net operating profit and would like to reduce costs in 2018 so that profit will increase. He decides to take advantage of the excess plant capacity and increase production to 350,000,000 even though he expects the company will be unable to increase unit sales in 2018.
Required
a. If Jim increases production to 350,000 units per year, what will be the new equivalent cost per unit?
b. Would increasing the production level be a good idea? Why or why not?
P3-18 Plastic Glow Company Number of units produced & sold: 300,000,000 Total Cost Per Unit Cost Direct Material Direct Labor Manufacturubg Overhead Total Cost per unit 0.50 a. If Jim increases production (but no expected increase in sales): Number of units produced: 350,000,000 Total Cost Per Unit Cost Direct Material Direct Labor Manufacturubg Overhead Total Difference in per unit cost: b. Would increasing the production level be a good idea? Yes/No and explain why. Hint: what does this do to the Return on Assets ratio?Explanation / Answer
Plastic Glow Company
Number of units produced & sold:
300,000,000
Total Cost
Per Unit Cost
Direct Material
15,000,000
0.05
Direct Labor
30,000,000
0.10
Manufacturubg Overhead
105,000,000
0.35
Total
$150,000,000
Cost per unit
0.50
a.
If Jim increases production (but no expected increase in sales):
Number of units produced:
350,000,000
Total Cost
Per Unit Cost
Direct Material
17,500,000
0.05
Direct Labor
35,000,000
0.10
Manufacturubg Overhead
122,500,000
0.35
Total
175,000,000
Cost per unit
0.50
b. Would increasing the production level be a good idea? Yes/No and explain why.
Ans. No. It’s not a good idea.
Explanation: The reason is why unnecessarily increasing the cost when there is no increase in sales. The variable cost per unit remains same whether you produce 300,000,000 or 350,000,000. Infact it shows an adverse effect by blocking the funds in inventory, maintenance cost or inventory carrying cost etc.
Plastic Glow Company
Number of units produced & sold:
300,000,000
Total Cost
Per Unit Cost
Direct Material
15,000,000
0.05
Direct Labor
30,000,000
0.10
Manufacturubg Overhead
105,000,000
0.35
Total
$150,000,000
Cost per unit
0.50
a.
If Jim increases production (but no expected increase in sales):
Number of units produced:
350,000,000
Total Cost
Per Unit Cost
Direct Material
17,500,000
0.05
Direct Labor
35,000,000
0.10
Manufacturubg Overhead
122,500,000
0.35
Total
175,000,000
Cost per unit
0.50
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