Question

Gummy Land Candies manufactures jaw-breaker candies in a fully automated process. The machine that produces candies was purchased recently and can make 5,000 per month. The machine costs $6,500 and is depreciated using straight line depreciation over 10 years assuming zero residual value. Rent for the factory space and warehouse and other fixed manufacturing overhead costs total $1,200 per month. Gummy Land currently makes and sells 3,900 jaw-breakers per month. Gummy Land buys just enough materials each month to make the jaw-breakers it needs to sell. Materials cost 40 cents per jaw-breaker. Next year Gummy Land expects demand to increase by 100%. At this volume of materials purchased, it will get a 10% discount on price. Rent and other fixed manufacturing overhead costs will remain the same Read the requirements. Requirement 1. What is Gummy Land's current annual relevant range of output? Gummy Land's current annual relevant range of output is

Answer 1

1. Gummy Land's current annual relevant range of output is 0 to 60,000 units.

Monthly production capacity is 5,000 units. Therefore, annual capacity is 5,000 x 12 = 60,000 units.

2. Gummy Land's current annual fixed manufacturing cost = $ 15,050.

Annual variable manufacturing cost = $ 18,720

Annual depreciation = $ 6,500 / 10 = $ 650.

Annual rent expense = 1,200 x 12 = $ 14,400.

Total annual fixed manufacturing cost = $ 650 + $ 14,400 = $ 15,050.

Annual variable manufacturing cost = 3,900 x 12 x $ 0.40 = $ 18,720.

3. Gummy Land's relevant range of output next year = 0 to 120,000 units.

Total annual fixed cost will increase by $ 650 next year. So it will be $ 15,700.

Total annual variable costs will increase by $ 14,976 next year.

Next year, the company plans to sell 7,800 units per month. As the current capacity of the machine is only 5,000 per month, a second machine would be needed to cater to the additional demand. Therefore the maximum production possible is 5,000 x 2 x 12 = 120,000 units.

Annual variable costs next year : $ ( 0.40 - 10 % ) x 7,800 x 12 = $ 33,696.