Question

McGovern is a car manufacturing company. It builds 2 types of cars: a sports car and a sports utility vehicle (SUV). Its vehicles are very popular among its customers. Recently, increased demand for both vehicles has caused the company to revisit its total number of cars to produce and unit costs for those vehicles. Each sports car generates 10 kilowatt hours of energy to be produced and each SUV requires 20 kilowatt hour of energy to be produced. Each kilowatt hour costs .25. The following chart breaks down McGovern’s expenses for producing the companies.  Presume the production of the sports car and SUV’s are split equally between the two vehicles.

Operating Costs	Amount
Insurance……………………………………………	$6,000 per month
Rent…………………………………………………	$15,000 per month
Salaries………………………………………………	$30,000 per month
Electricity……………………….………………….....	Sports car: 10 kilowatt hours of energy SUV:         20 kilowatt hours of energy
Shipping costs………………………….....................	Sports cars: $1,000 for the first 2000 sports car shipped + 1 dollar per each additional vehicle shipped SUV: $1,000 for the first 1500 SUV shipped + 1.50 dollars per each additional vehicle shipped

McGovern normally produces 2000 sports cars and 1500 SUV’s. The increased demand has the company estimating production needing to increase to 3500 sports cars and 3000 SUV’s. However, McGovern has the capacity to produce 5000 sports cars and 4000 SUV’s.

For this assignment, please do the following:

1.      Develop a graphical analysis of the operating costs in relation to the units produced for the sports car and SUV. Following the development of the graphs, provide an explanation of your graphs discussing the relationship of the costs with respect to the number of units produced.

2.      Determine the behavior per unit costs in relation to the fixed costs and variable costs and explain what takes place when you increase and decrease the number of units of the sports car and the SUV. (It may be best to create a table for each vehicle.)

3.      Determine the fixed cost per unit for each vehicle if it is at normal production, production due to increased demand, and if McGovern were to produce the vehicles at maximum capacity production. After calculating the fixed cost per unit for each vehicle, provide an explanation as to what happens to the fixed costs as the number of units increase with each production increase. Please be sure to show the work done to reach your conclusions.

4.      Finally, based on the cost information provided and the calculation you have performed, determine whether the company should maintain production, increase production based on demand, or produce at maximum capacity and provide an explanation as to why your selected option is the best option.

Answer 1

MC Govern car company SUV sports operating / Production Costs (units) nature of Cost. 1500 3000 4000 2000 3500 5000 Insurance 6000 3,000 3000 3,000 3,000 3000 3,000 fined Rent 15,000 | 7,500 7,500 7,500 7,500 fixed Salaries 30,000 15,000 15,000 15,000 15,000 1 7500 17,500 15000 15,000 17500 25,000 fined Clectricity 0.25 7,500 15,000 20,000 10,000 Variable shipping 1000 | 1000 3,250 4,750 1,000/ - 2,500 4,000 Semi Variable Total 34,000 43,750 50,250 36,500 45,500 54,500

LLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLL Op Costs suv Op Costs - Sporty 60,000 60,000 500 50,000 40,00 30,000 பு 39000 20.000 20,000 10.00 10.000 1500 3000 4000 2000 3500 Sooo - insurance - Rent - Salaries - Electricily - Shipping - Insurance - Rent - Salaries The – Eleclicily - Shipping Total Fixed costs remain he the Same at all levels of Same at all levels of productions whereas o and oble the variable semi-variable costs costs increase increase as as the the ox production increases. as we can see Poom the table and the charts, the insurance, Salaries and Rent costs draw a horizontal line along the x-axis (the levels of production), whereas the variable cost (Electricily) and Semi- Variable cost (shipping) move upwards as the produccion levels increase.

a) lopesaling Sports Production (units) Suv | 1500 | 3000 1500 Nature of ! - Cost. Costs 4000 2000 3500 5000 Insurance 6,000 0.75 1.50 0.86 0.60 fixed Rent 15,000 | 2.50 1.88 | 3.75 2.14 1.50 fixed Salaries 30,000 5.00 3.75 7.50 4.29 3.00 fixed 0.25 5.00 5.00 5.00 2.50 2.50 2.50 Variable electricity Shipping 1000 10.67 1.08 11.19 0.50 0.71 0.80 Semi variable 22.67 Total 14.58 12.56 15.75 10.50 8:40

the costs 3) we arrive at the per unit cost by distribuling over local the number of units produced. ns such, the Fixed costs, which remain the same at 011 levels of aclivity, get distributed over of units different number each at level of activity. Hence, the per cost unit decreases with each unit produced. we can see that the per unit Insurance Cost is $2 for 1500 units, 1 al 3000 units and @ 0.75 at 4000 units. The variable costs are fixed per unit and hence are directly Delaled to units produced. As a result, they increase with increase in produclion and decrease with decrease in produclion. 4) The Company eslimales a demand of 3500 Spoots cars and 3000 suvs. Now looking at the per unit Cost for the three levels of aclivily, we find that the lotal Cost per unit for 4000 Suus comes to 12.56 and 5000 Sports cars comes lo 8.40, which is lower than the per unit Costs for the current level of aclivity and also the eslimated demand level . Going by the per unit costs, the company should operate at poll capacity. M ITTITYTTRINPITELLO

(However, this would build up inuenlooy and the company will incure inventory holding costs and marketing expenses to Push the demande)