Final answer:
The cost of production for Eucalyptus Company at the activity level of 2,200,000 units is calculated by summing the total variable costs and fixed costs, resulting in a total production cost of $1,913,000 (option b).
Step-by-step explanation:
When calculating the cost of production for Eucalyptus Company, it is important to understand that total costs are the sum of fixed costs and variable costs. Fixed costs are expenditures that do not change with the level of output, such as rent and depreciation. Variable costs vary with the level of production, including costs for direct materials, direct labor, and variable overhead like supplies, indirect labor, and power.
To calculate the total variable cost at the activity level of 2,200,000 units, we first add the variable costs per unit: $0.35 for direct materials, $0.28 for direct labor, $0.04 for supplies, $0.09 for indirect labor, and $0.03 for power. This gives a total variable cost per unit of $0.79. We then multiply this by the number of units (2,200,000) to find the total variable cost:
Total Variable Cost = 2,200,000 units × $0.79/unit = $1,738,000
Next, we add the budgeted fixed costs per quarter, which are $25,000 for rent and $150,000 for depreciation, giving a total fixed cost of $175,000:
Total Fixed Cost = $25,000 + $150,000 = $175,000
Finally, we find the total production cost by adding the total variable cost and the total fixed cost:
Total Production Cost = Total Variable Cost + Total Fixed Cost = $1,738,000 + $175,000 = $1,913,000
Therefore, the cost of production at the activity level of 2,200,000 units for Eucalyptus Company is $1,913,000 which corresponds to option b.