Question

1. Galena Corporation produces automobile tires. They have a single factory and own the machinery and equipment used to produce the tires. The total capacity cost is $100,000 per year. Galena's managers estimate that the factory, if run 24 hours per day, every day, could produce 100,000 tires per year. However, given the machinery and equipment need regular maintenance, and employees require holidays, vacation time, and sick time, a more realistic estimate is 80,000 tires per year. Over the past five years, the average demand is 50,000 tires per year. This year, managers anticipate demand of 75,000 tires. What is the capacity cost per tire if managers use normal capacity as the basis? O $1.33 per tire $2.00 per tire O $1.25 per tire $1.00 per tire Rochelle Company is an Internet service provider. They own a large number of servers and other equipment, which costs $200,000 per year. 2. Capacity costs estimates are reported on a per service hour basis. Managers estimate that, on average, the cost per hour demanded is $2.50 per hour. This year, managers estimate that the cost per hour demanded is $2.67 per hour. When managers take into account normal server downtime, the cost per hour supplied is $2.22. Ignoring this normal server downtime, the cost per hour supplied is $2.00. Based on this information, what is Rochelle Company's theoretical capacity? 80,000 hours O 90,000 hours O 75,000 hours O 100,000 hours 3. Rockford Incorporated produces two products, Product A and Product B. Product A's selling price and variable costs are $20 and $12 per unit, respectively. Product B's selling price and variable costs are $18 and $11 per unit, respectively. Machine time used to produce both products is constrained. Product A uses 2 hours per unit to produce one unit. Product Buses 1.7 hours per unit to produce one unit. Given this information, which of the following statements are correct? (Check all that apply.) Managers will prefer to sell Product B because it uses less machine time. Managers will prefer to sell Product A because its contribution margin per machine hour is higher. Product A earns $8 per machine hour. Product A earns $4.00 per machine hour. Product Bearns $4.12 per machine hour Product Bearns $7 per machine hour.

Answer 1

Compute the capacity cost per tire, using the equation as shown below:

Capacity cost per tire = Total capacity cost/ Anticipated demand

                                   = $100,000/ 75,000 tires

                                   = $1.33 per tire

Hence, the capacity cost per tire is $1.33.   

Note:

The normal capacity is the expected capacity over the longer period of time.