Question

Fizzy -Cola spends $3 on direct materials, direct labor, and variable manufacturing overhead for every unit (12-pack of soda) it produces. Fixed manufacturing overhead costs $6 million per year. The plant, which is currently operating at only 70% of capacity, produced 30 million units this year. Management plans to operate closer to full capacity next year, producing 40 million units. Management doesn't anticipate any changes in the prices it pays for materials, labor, and manufacturing overhead Read the requirements Requirement 1. What is the current total product cost (for the 30 million units), including fixed and variable costs? Determine the formula, then calculate the current total product cost (for the 30 million units), including fixed and variable costs. Total variable costs Total foxed costs Total product costs million 6 million million

Answer 1

Variable Cost per unit remains the same irrespective of the change in number of units produced. It is $3 per unit.

Fixed Cost per unit changes with the change in number of units produced. It is $6 million per year.

Company is working at 70% of its normal capacity and produced 30 million units.

According to above the following costs are calculated:-

1. Current Total Cost = Variable Cost + Fixed Cost

Total Cost = $3×30 million units + $6 million = $96 million

2. Current Average Product Cost per unit = Total Cost ÷ Number of Units Produced

Average Product Cost per unit = $96 million ÷ 30 million = $3.2 per unit

3. Current Fixed Cost per unit = Total Fixed Cost ÷ Number of units produced = $6 million ÷ 30 million = $0.20 per unit

Company plans to operate closer to full capacity i.e. to produce 40 million units.

4. Forecasted Total Product Cost next year =

$3×40million + $6million =$126 million

5. Forecasted Average Product Cost next year =

$126million ÷ 40million =$3.15 per unit

6. Forecasted Fixed Cost per unit = $6million ÷ 40 million =$0.15 per unit

7. The Average Product Cost has decreased due to increase in production, because the fixed cost has remained the same, it is only variable cost that has changed due to change in number of units, as the company has operated well within their normal capacity.