Question

Creating and Using a Cost Formula

Big Thumbs Company manufactures portable flash drives for computers. Big Thumbs incurs monthly depreciation costs of $15,400 on its plant equipment. Also, each drive requires materials and manufacturing overhead resources. On average, the company uses 10,200 ounces of materials to manufacture 5,100 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 $30,600 of variable manufacturing overhead resources to produce 5,100 flash drives per month.

In your calculations, round variable rate per flash drive to the nearest cent. If required, round final answers to the nearest cent.

Required:

1. Create a formula for the monthly cost of flash drives for Big Thumbs.

Total cost of flash drives = Fixed cost  + ( Variable rate  x Number of flash drives)

Total cost of flash drives = $ + ($ x Number of flash drives)

2. If the department expects to manufacture 6,000 flash drives next month, what is the expected fixed cost (assume that 6,000 units is within the company's current relevant range)?
$

What is the total variable cost (assume that 6,000 units is within the company's current relevant range)?
$

What is the total manufacturing cost (i.e., both fixed and variable) (assume that 6,000 units is within the company's current relevant range)?
$

Answer 1

Answer:

1.

Total cost of flash drives = $ 15,400 + ($12 x Number of flash drives)

2. If the department expects to manufacture 6,000 flash drives next month, what is the expected fixed cost (assume that 6,000 units is within the company's current relevant range)?

$ 15,400

What is the total variable cost (assume that 6,000 units is within the company's current relevant range)?
$ 72,000

What is the total manufacturing cost (i.e., both fixed and variable) (assume that 6,000 units is within the company's current relevant range)?
$ 87,400

Calculation:

1.

Fixed Costs:

$15,000 (Depreciation Cost)

Variable Costs:

Materials:

1,200 ounces/5,100 flash drives = 2 ounce/flash drive

= 2 ounce/flash drive x $3.00 = $6/flash drive for materials

Overhead Resources:

$30,600/5,100 flash drives = $6.0/flash drive

Total Variable Costs = $6.0+ $6.0= $12.0

Total cost of flash drives = Fixed cost  + ( Variable rate  x Number of flash drives)

So, substitute 15,400 for fixed cost and 12 for variable cost

Total cost of flash drives = $ 15,400 + ($12 x Number of flash drives)

2.

The fixed cost remains the same irrespective of change in the number of units. So,

Total Fixed Cost = 15,400

The variable cost is calculated by muliplying the variable cost per unit calculated in 1 with the 6000 units:

Total Variable cost =  $12 x 6,000 = 72,000

So, the Total Manufacturing Cost is calculated as below:

Total Fixed Cost	15,400
Total Variable Cost	72,000
Total Manufacturing Cost	87,400