Question

ACC522 ✓ Correct! Question: XIAN Manufacturing produces a unique valve, and has the capacity to produce 50.000 valves annually Currently XIAN produces 40,000 valves and is thinking about increasing production to 45.000 valves next year What is the most key behavior of total manufacturing costs and unit manufacturing costs given this change? Correct Answer Total manufacturing costs will increase and unit manufacturing costs wil decrease CK ♡ db 100 III

Explain the answer please

Answer 1

Total Manufacturing costs comprises of Fixed costs and Variable costs. Total Fixed costs do not change with the change in output. Total Fixed costs remain same for a given production capacity. Total Variable costs change with change in Output. Higher the Production output, higher will be the variable cost. Lesser the Production output, lower will be the variable costs.

In the given case, Production capacity is 50000 units. Therefore, total variable costs will increase because of change in production quantity from 40000 units to 45000 units. But total fixed costs remain same with change in output.

Hence, total manufacturing costs will increase due to increase in total variable costs because of increase in production.

Unit Variable cost remain same and Unit Fixed costs will decrease with the increase in production because total fixed costs are absorbed by more number of units produced.

Hence, Unit Manufacturing costs will decrease due to increase in production because of decrease in fixed cost per unit.