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A manufacturer produces 100 units per month with fixed costs of $3030 per month. For every 100 units produced there are 4 faulty items to dispose of, resulting in 96% of production being acceptable Production cost $90 per unit and disposal is free. The 4 units made x $90-$360 The cost formula for decision-making would look like this: $3,030 $360+$90 (units produced)(.96) True O False

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Answer #1

The cost formula given is

$3030+$360+$90(Units produced)*0.96

can be rewritten as

Fixed cost+ Cost of defective items+Variable Cost*Number of units produced*% of production acceptable

It can be seen that the cost of the defective item is constant i.e. $360. Since the number of defects per 100 items produced is 4, therefore as production will increase the number of defects will also increase and hence the cost of defective items will also increase with the number of units produced.

Thus the cost equation given is not correct.

Hence the answer is FALSE.

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