Question

Da Company produces a handcrafted musical instrument called a gamelan that is similar to a xylophone. The gamelans are sold for $968. Selected data for the company’s operations last year follow:

Units in beginning inventory 0
Units produced 25,000
Units sold 22,000
Units in ending inventory 3,000
Variable costs per unit:
Direct materials $ 270
Direct labor $ 460
Variable manufacturing overhead $ 60
Variable selling and administrative $ 20
Fixed costs:
Fixed manufacturing overhead $ 940,000
Fixed selling and administrative $ 410,000


Required:

1. Assume that the company uses absorption costing. Compute the unit product cost for one gamelan. (Round your intermediate calculations and final answer to the nearest whole dollar amount.)

2. Assume that the company uses variable costing. Compute the unit product cost for one gamelan.

Answer 1

Calculating total revenue, total cost, marginal revenue, and marginal cost helps determine the profit-maximizing quantity for a business. Concepts from economics are key in understanding the relationship between production levels and profitability, and creating diagrams aids in visualizing these concepts.

Step-by-step explanation:

The AAA Aquarium Co. and the Doggies Paradise Inc. scenarios both require an understanding of basic business concepts such as total revenue, total cost, marginal revenue, and marginal cost. Additionally, they involve the determination of the profit-maximizing quantity through the analysis of these parameters. The process of calculating these figures involves using information about the cost structure of the company and the pricing of its products.

Profit-maximizing quantity is determined at the output level where marginal revenue equals marginal cost or where the additional revenue from selling one more unit is equal to the additional cost of producing that unit. Beyond this point, producing additional units would decrease profits. To ascertain this point, it is necessary to calculate the marginal cost for each additional unit.

Furthermore, to visualize the relationship between these business metrics, diagrams depicting total revenue and total cost curves, as well as marginal revenue and marginal cost curves, are used. These diagrams illustrate the impact of various output levels on a firm's profitability, leading to the identification of the most advantageous production level.