Question

Carlton company has gathered the following information:

Units in beginning work in process: 25,000 units
Units started into production: 115,000 units
Units in ending work in process: 30,000 units
Percent complete for conversion costs in ending work in process: 60%
Costs incurred:
Direct materials: $25,000
Direct labor: $115,000
Overhead: $30,000

What is the total cost of production for Carlton company?

Answer 1

The best production method for Carlton company is Method 1, with the lowest total cost of $9,000 initially and $14,000 when the cost of labor rises to $200/unit.

Step-by-step explanation:

When assessing the best production method for Carlton company, considering the given costs for labor and capital, one must calculate the total cost for each production method. At a labor cost of $100/unit and capital cost of $400/unit, the costs for each method are as follows:

• Method 1: (50 units of labor × $100) + (10 units of capital × $400) = $5,000 + $4,000 = $9,000
• Method 2: (20 units of labor × $100) + (40 units of capital × $400) = $2,000 + $16,000 = $18,000
• Method 3: (10 units of labor × $100) + (70 units of capital × $400) = $1,000 + $28,000 = $29,000

Under these cost conditions, Method 1 has the lowest total cost and is therefore the best production method.

If the cost of labor rises to $200/unit, the costs for each method will be:

• Method 1: (50 units of labor × $200) + (10 units of capital × $400) = $10,000 + $4,000 = $14,000
• Method 2: (20 units of labor × $200) + (40 units of capital × $400) = $4,000 + $16,000 = $20,000
• Method 3: (10 units of labor × $200) + (70 units of capital × $400) = $2,000 + $28,000 = $30,000

With the increased labor cost, Method 1 still maintains the lowest total cost, indicating it remains the best production method even with the cost change.