Question

Baird Modems has excess production capacity and is considering the possibility of making and selling paging equipment. The following estimates are based on a production and sales volume of 1,200 pagers. Unit-level manufacturing costs are expected to be $22. Sales commissions will be established at $1.20 per unit. The current facility- level costs, including depreciation on manufacturing equipment ($62,000), rent on the manufacturing facility ($52,000), depreciation on the administrative equipment ($12,600), and other fixed administrative expenses ($72,950), will not be affected by the production of the pagers. The chief accountant has decided to allocate the facility-level costs to the existing product (modems) and to the new product (pagers) on the basis of the number of units of product made (i.e., 5,200 modems and 1,200 pagers). Required a. Determine the per-unit cost of making and selling 1,200 pagers. (Do not round intermediate calculations. Round your answer to 3 decimal places.) b. Assuming the pagers could be sold at a price of $36 each, should Baird make the pagers? a. Cost per unit b. Should Baird make the pagers?

Answer 1

Let us understand the question in detail

Current facility level costs are

1. Depreciation on manufacturing equipment
2. Rent on manufacturing facility
3. Depreciation on administrative equipment
4. Other fixed administrative expenses

The question says the facility level costs are WILL NOT BE AFFECTED BY THE PRODUCTION OF THE PAGERS.

This means even if the pagers were not produced these costs would still be incurred. So if we talk about company level profits these costs wouldn't make an impact. It'd only be allocated between modems and pagers.

a.

The cost per unit = Manufacturing cost + Sales commission = 22 + 1.2 = $ 23.2 per unit

b.

Since the sale price is $ 36, the pagers should be sold (YES) because overall at the company level it'd bring in additional profits.