Variable costs, fixed costs, relevant range. Dotball Candies manufactures jaw-breaker candies in a fully automated process. The machine that produces candies was purchased recently and can make 4,400 per month. The machine costs $9,500 and is depreciated using straight-line depreciation over 10 years assuming zero residual value. Rent for the factory space and warehouse and other fixed manufacturing overhead costs total $1,300 per month. Dotball currently makes and sells 3,100 jaw-breakers per month. Dotball buys just enough materials each month to make the jaw-breakers it needs to sell. Materials cost 10 cents per jawbreaker. Next year Dotball expects demand to increase by 100%. At this volume of materials purchased, it will get a 10% discount on price. Rent and other fixed manufacturing overhead costs will remain the same.
1. What is Dotball’s current annual relevant range of output?
2. What is Dotball’s current annual fixed manufacturing cost within the relevant range? What is the annual variable manufacturing cost?
3. What will Dotball’s relevant range of output be next year? How, if at all, will total annual fixed and variable manufacturing costs change next year? Assume that if it needs to Dotball could buy an identical machine at the same cost as the one it already has.
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