Question

Uses the FIFO method to compute equivalent units of production. It has 2000 units in the beginning. What is the number of equivalent units of production?

1) 1000 units
2) 2000 units
3) 3000 units
4) 4000 units

Answer 1

The best production method initially is Method 1 with the lowest total cost of $9,000. If the cost of labor rises to $200/unit, Method 1 still remains the most cost-effective with a total cost of $14,000.

Step-by-step explanation:

The question asks for the best production method considering the costs of labor and capital using three different production methods. Initially, labor costs $100/unit, and capital costs $400/unit. To determine which method is the most cost-effective initially, we can calculate the total costs for each method:

• 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

Therefore, the best production method initially is Method 1 with the lowest cost of $9,000.

If the cost of labor rises to $200/unit, we recalculate:

• 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 remains the best production method at a cost of $14,000.