Question

Middle Industries produces a sensor for use in manufacturing. It produces the sensor in a plant with an annual practical capacity of 76,000 units. The variable cost of the sensor is $186 per unit, and the fixed costs of the plant are $12,540,000 annually. Current annual demand is 55,000 sensors. Middle Industries bought the plant because it was close to its other manufacturing facilities and was available for sale when they were searching for a location. What cost per sensor should the cost system report to facilitate management decision making?

Answer 1

The cost system should report a cost per sensor of $414.55.

Step-by-step explanation:

In order to determine the cost per sensor that the cost system should report to facilitate management decision making, we need to consider the concept of economies of scale. Economies of scale refer to the decrease in unit cost as production volume increases. In this case, Middle Industries produces 55,000 sensors annually, which is less than the practical capacity of the plant (76,000 units).

Based on the information provided, we can calculate the average cost per sensor by dividing the total costs (fixed costs + variable costs) by the annual demand. The fixed costs of the plant are $12,540,000 annually and the variable cost per sensor is $186.

Average cost per sensor = (Fixed costs + Variable costs) / Annual demand

= ($12,540,000 + ($186 * 55,000)) / 55,000

= ($12,540,000 + $10,230,000) / 55,000

= $22,770,000 / 55,000

= $414.55

Therefore, the cost system should report a cost per sensor of $414.55 to facilitate management decision making.