K-Too Everwear Corporation can manufacture mountain climbing shoes for $24.86 pe
ID: 2667149 • Letter: K
Question
K-Too Everwear Corporation can manufacture mountain climbing shoes for $24.86 per pair in variable raw material costs and $14.08 per pair in variable labor expense. The shoes sell for $135 per pair. Last year, production was 120,000 pairs. Fixed costs were $1,550,000.What were total production costs?
What is the marginal cost per pair?
What is the average cost?
If the company is considering a one-time order for an extra 5000 pairs, what is the minimum acceptable total revenue from the order? Explain.
Explanation / Answer
Variable raw material cost 120,000 Pairs @ $24.86 = $2,983,200
Variable labor cost per pair 120,000 @ $14.08 = 1,689,600
Total Variable cost = 4,672,800
Fixed costs were = 1,550,000
Therefore the total production costs are sum of Fixed and variable cots.
Total production costs = $6,222,800
Suppose if the Out put is increased by 1 pair then
Variable raw material cost 120,001 pairs @ $24.80 = $2,983,224.86
Variable labor cost 120,001 pairs @ $14.08 = 1,689,614.08
Fixed costs were = 1,550,000
Total cost = $ 6,222,838.94
Less: Total cost for out put 120,000 Pairs 6,222,800
Marginal cost per pair = $38.94
Average cost is = (Fixed cost + Variable cost)/ No of pairs produced
= ($1,550,000 +$4,672,800)120,000
= 6,222,800/120,000
= $51.85
For 5000 pairs the total cost of production is as follows.
Variable raw material cost 5000 pairs @ $24.86 = $124,300
Variable labor expense 5000 pairs @ 14.08 = 70,400
Fixed cost per pair ($1,550,000/120,000 = $12.92) = 64,600
Total cost for 5000 pairs is = $259,300
The shoes sell for $135 per pair. Therefore total sales revenue for 5000 shoes is
= 5000*$135
=$675,000
The minimum revenue is = Total sales revenue – Total costs
= $675,000 - $259,300
= $415,700
Therefore the minimum acceptable revenue is $415,700
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