Question

Required information

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Mason Corporation began operations at the beginning of the current year. One of the company’s products, a refrigeration element, sells for $195 per unit. Information related to the current year’s activities follows.

                                               

Variable costs per unit:                               

Direct material- $15        

Direct labor - 35               

Manufacturing overhead- 46      

Annual fixed costs:                                        

Manufacturing overhead- $600,000         

Selling and administrative- 860,000          

Production and sales activity:                                    

Production (units)- 24,000           

Sales (units)- 20,000       

Mason carries its finished goods inventory at the average unit cost of production and is subject to a 30 percent income tax rate. There was no work in process at year-end.

3. If next year’s production decreases to 23,000 units and general cost behavior patterns do not change, what is the likely effect on:

a. The direct-labor cost of $35 per unit?

1. No change
2. Increase
3. Decrease

b. The fixed manufacturing overhead cost of $600,000?

1. No change
2. Increase
3. Decrease

c. The fixed selling and administrative cost of $860,000?

1. No change
2. Increase
3. Decrease

d. The average unit cost of production?

1. No change
2. Increase
3. Decrease

Answer 1

a)	Direct labor cost per unit would not change as it is a variable cost.
	Correct Option: A
b)	Total fixed manufacturing cost would not be changed because it is a period cost
	it does not change with change in the scale of production and sales.
	Correct Option: A
c)	Total selling and administrative cost would not be changed because it is a period cost
	it does not change with change in the scale of production and sales.
	Correct Option: A
d)	The average unit cost of production would change as it contains
	fixed cost of manufacturing per unit. Fixed cost of manufacturing per unit
	will change with changes in production units.
	Since production decreases fixed cost per unit would be increased.
	Hence the average cost per unit would also be increased.
	Correct Option: B