Question

Last month, Sprockets, Inc., manufactured 12,000 widgets. The firm's total cost for making the widgets was $240,000. Of that amount, $60,000 was due to fixed costs, and the rest was due to variable costs. Next month, Sprockets expects to manufacture 15,000 widgets. Assuming the firm's total fixed costs and variable costs per unit remain the same, which of the following statements is accurate?

a. Sprockets' fixed costs will remain at $5 per widget, but its total manufacturing costs will increase to $285,000.
b. Sprockets' fixed costs will drop to $4 per widget, but its total manufacturing costs will increase to $285,000.
c. Sprockets' fixed costs will drop to $3 per widget, but its total manufacturing costs will remain constant at $240,000.
d. Sprockets' fixed costs will drop to $3 per widget, but its total manufacturing costs will increase to $360,000.

Answer 1

The correct statement is b: Sprockets, Inc.'s fixed cost per widget will decrease to $4 when they increase production to 15,000 widgets, and total manufacturing costs will increase to $285,000. Option b

Step-by-step explanation:

To solve this problem, we need to understand that total costs are comprised of fixed costs and variable costs. Fixed costs are those that do not change regardless of production levels, while variable costs change in proportion to the level of production.

Given that Sprockets, Inc. has fixed costs of $60,000, these costs will remain constant regardless of how many widgets are produced.

Variable costs for manufacturing 12,000 widgets can be calculated by subtracting the fixed costs from the total costs ($240,000 - $60,000 = $180,000). To find the variable cost per unit, we divide the total variable costs by the number of widgets produced ($180,000 / 12,000 = $15 per widget). If next month the company manufactures 15,000 widgets, with the same variable cost per unit, the total variable costs will be 15,000 widgets × $15/widget = $225,000.

Adding the fixed costs ($60,000) and the new variable costs ($225,000) gives us the total manufacturing costs for 15,000 widgets, which is $285,000. The fixed cost per unit for next month is calculated by dividing the total fixed costs by the number of widgets ($60,000 / 15,000), which equals $4 per widget.

Therefore, statement b is accurate: Sprockets' fixed costs will drop to $4 per widget, but its total manufacturing costs will increase to $285,000. Option b