Question

Happy Manufacturing produces a unique valve, and has the capacity to produce 50,000 valves annually. Currently, Happy produces 40,000 valves and is thinking about increasing production to 45,000 valves next year. What is the most likely behavior of total manufacturing costs and unit manufacturing costs given this change?

1) Total manufacturing costs will increase and unit manufacturing costs will stay the same
2) Total manufacturing costs will increase and unit manufacturing costs will decrease
3) Total manufacturing costs will stay the same and unit manufacturing costs will stay the same
4) Total manufacturing costs will stay the same and unit manufacturing costs will decrease

Answer 1

If Happy Manufacturing increases production from 40,000 to 45,000 valves, total manufacturing costs will increase due to more units being produced, while unit manufacturing costs will decrease because of economies of scale.

Step-by-step explanation:

The student has inquired about the behavior of total manufacturing costs and unit manufacturing costs if Happy Manufacturing increases production from 40,000 to 45,000 valves yearly. Considering the company operates within its production capacity of 50,000 valves, the increase in production is likely to lead to higher total costs due to the production of more units. However, the unit cost is expected to decrease as the additional units can be produced by spreading the fixed costs over a larger number of units, benefiting from economies of scale. Therefore, the correct answer is that total manufacturing costs will increase and unit manufacturing costs will decrease.