Question

Kubin Company's relevant range of production is 21,000 to 25,000 units. When it produces and sells 23,000 units, its average costs per unit are as follows: Average Coat Unit Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Fixed selling expense Fixed administrative expense Sales commissions Variable administrative expense Required: 1. What is the incremental manufacturing cost incurred if the company increases production from 23.000 to 23.001 units? 2. What is the incremental cost incurred if the company increases production and sales from 23,000 to 23,001 units? 3. Assume that Kubin Company produced 23,000 units and expects to sell 22,690 of them. If a new customer unexpectedly embrges and expresses interest in buying the 310 extra units that have been produced by the company and that would otherwise remain unsold, what is the incremental manufacturing cost per unit incurred to sell these units to the customer? 4. Assume that Kubin Company produced 23,000 units and expects to sell 22,690 of them. If a new customer unexpectedly emerges and expresses interest in buying the 310 extra units that have been produced by the company and that would otherwise remain unsold, what incremental selling and administrative cost per unit is incurred to sell these units to the customer?

Answer 1

1) Variable costs are those costs which would remain the same per unit irrespective of level of production or sales. It is an unit cost to be incurred by the firm only when the firm carries out its business operation. Fixed costs are those costs which would remain the same in total irrespective of level of production or sales. It is a committed cost to be incurred by the firm whether it carries out operations or not. Relevant costs are those costs which would increase or decrease when production or sales volume increase or decrease within the relevant range of production. In simple words, only the variable costs and expenses are the relevant costs as fixed costs and expenses will remain unchanged within the relevant production or sales volume and so variable costs and expenses only shall be considered as incremental costs for producing and selling one more additional units within the relevant range of production or sales. Product costs are (or manufacturing costs) those costs which are incurred at factory to produce required number of units. Therefore, Direct materials Direct labor Variable manufacturing overhead Incremental manufacturing cost per unit $8.10 $5.10 $2.60 $15.80

2) Period costs are those costs which are not incurred at factory during production process. In other words, these costs are incurred to carry out firm's operating activities such as selling and adminitrative expenses. These costs include even financial expenses such as interest expense, etc. Total cost = Mfg. cost + Period cost. For incremental cost calculation purpose, only the variable mfg., sell. & admin. costs shall be considered as relevant costs as fixed costs are not affected by this. Therefore, [Ref: Part-1] [Variable in nature] Incremental manufacturing cost per unit Sales commissions Variable administrative expense Incremental total cost per unit $15.80 $2.10 $1.60 $19.50

When a firm produced 23000 units and sold 22690 units, it has balance 310 units on hand. It means that variable manufacturing overhead costs would have been specifically incurred to produce the unsold 310 units. If the firm receives any order order upto 310 units, the manufacturing cost must include variable mfg. costs only. Direct materials Direct labor Variable manufacturing overhead Incremental manufacturing cost per unit $8.10 $5.10 $2.60 $15.80 4) Just as explained in part-3, if the firm receives any order upto 310 units, its incremental selling and administrative costs must include variable selling and administrative costs only because fixed selling and administrative costs were sunk costs which would have no impact on those unsold 310 units. Sales commissions Variable administrative expense Incremental sell. & admin. cost per unit $2.10 $1.60 $3.70