Question

Brief Exercise 3-16 Creating and Using a Cost Formula Big Thumbs Company manufactures portable flash drives for computers. Big Thumbs incurs monthly depreciation costs of $15,000 on its plant equipment. Also, each drive requires ma terials and manufacturing overhead resources. On average, the company uses 10,000 ounces of materials to manufacture 5,000 flash drives per month. Each ounce of material costs $3.00. In addition, manufacturing overhead resources are driven by machine hours. On average, the company incurs $22,500 of variable manufacturing overhead resources to produce 5,000 flash drives per month. Required: 1. Create a formula for the monthly cost of flash drives for Big Thumbs. 2. If the department expects to manufacure 6,000 flash drives next month, what is the expected fixed cost (assuming that 6,000 units is within the company's current relevant range)? Total variable cost? Total manufacturing cost (i.e. both fixed and variable)?

Answer 1

1/ We have:

Output-5,000.00

Depreciation costs-$ 15,000.00

Materials used -30,000.00 (10000*3)

Manufacturing overhead=22,500.00

Variable rate = (Materials used+ variable manufacturing OH)/ Output

=10.50 ((30000+22500)/5000)

Total cost = (variable rate x out put) + FC

Variable rate=$10.50

FC= 15000

Total cost = $15,000 + ($10.50 x output)

2) 6,000 flash drives

What is the expected fixed cost = $15,000.00

Total variable cost = $10.50 x 6,000 = $63,000

Total manufacturing cost = $15,000 + $63,000 = $78,000