Homework Answers
Solution of the above problem is under:
1)
| Flexible Budget | ||||
| Particulars | Variable Cost per Unit | 3500 Units | 4000 Units | 4500 Units |
| Direct Material | 2 leather strips @ $7 | 49000 | 56000 | 63000 |
| Direct Labour | 1.5 Hrs. @ $18 | 94500 | 108000 | 121500 |
| Variable Overhead | 1.5 Hrs. @ $1.20 | 6300 | 7200 | 8100 |
| Fixed Overhead | 6800 | 6800 | 6800 | |
| Total | 156600 | 178000 | 199400 | |
| Cost per unit produced= | (Total Cost/Units Produced) | 44.74 | 44.50 | 44.31 |
2) Summary:
Unit Cost at 3500 Units= $44.74
Unit Cost at 4000 Units= $44.50
Unit Cost at 4500 Units= $44.31
As we can see from above (keeping Fixed Overhead Cost Constant), UNIT COST keeps on decreasing as the number of units produced increases. This is due to the fact that the fixed cost per unit decreases as the production increases highlighting the benefit of Economies of Scale.
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