Question

Grand-cola spends $3 on direct materials, direct labor, and variable manufacturing overhead for every unit (12-pack of soda) it produces. Fixed manufacturing overhead costs

$3million per year. The plant, which is currently operating at only 80 %

of capacity, produced 15 million units this year. Management plans to operate closer to full capacity next year, producing 25

million units. Management doesn't anticipate any changes in the prices it pays for materials, labor, and manufacturing overhead.

1.

What is the current total product cost (for the 15 million units), including fixed and variable costs?
2.

What is the current average product cost per unit?

3.

What is the current fixed cost per unit?

4.

What is the forecasted total product cost next year (for the25 million units), including fixed and variable costs?
5.

What is the forecasted average product cost next year?

6.

What is the forecasted fixed cost per unit?

7.

Why does the average product cost decrease as production increases?

Answer 1

The current total product cost is $45 million, the current average product cost per unit is $3, the current fixed cost per unit is $0.20. The forecasted total product cost next year is $75 million, the forecasted average product cost next year is $3, and the forecasted fixed cost per unit is $0.12. The average product cost decreases as production increases due to the spreading of fixed costs over a larger number of units.

Step-by-step explanation:

1. The current total product cost, including fixed and variable costs, can be calculated by multiplying the number of units (15 million) by the total cost per unit ($3). So the current total product cost is $45 million.

2. The current average product cost per unit can be calculated by dividing the current total product cost ($45 million) by the number of units (15 million). So the current average product cost per unit is $3.

3. The current fixed cost per unit is calculated by dividing the fixed manufacturing overhead costs ($3 million) by the number of units (15 million). So the current fixed cost per unit is $0.20.

4. The forecasted total product cost next year, including fixed and variable costs, can be calculated by multiplying the number of units (25 million) by the total cost per unit ($3). So the forecasted total product cost next year is $75 million.

5. The forecasted average product cost next year can be calculated by dividing the forecasted total product cost next year ($75 million) by the number of units (25 million). So the forecasted average product cost next year is $3.

6. The forecasted fixed cost per unit is calculated by dividing the fixed manufacturing overhead costs ($3 million) by the number of units (25 million). So the forecasted fixed cost per unit is $0.12.

7. The average product cost decreases as production increases because the fixed costs are spread over a larger number of units. This means that the fixed cost per unit decreases as more units are produced, resulting in a lower average product cost.

Answer 2

Instructions are listed below

Step-by-step explanation:

Giving the following information:

Q=15 million

Q*=25 million

Unitary variable cost= $3

Fixed manufacturing overhead costs $3million per year

A) For Q:

Total cost= 3000000+15000000*3= $63000000

B) Average cost per unit=63000000/15000000=$4.2

C) Fixed cost per unit= 3000000/15000000= $0.2

D) Q*=25000000

Total cost= 30000000+25000000*3=$78000000

E) Fixed cost per unit= 3000000/25000000= $0.12

D) It decreases because the fixed costs are distributed by more units.