The Plastic Glow Company makes glow sticks. It uses a process costing system and has had a just-in-time inventory policy. The plant has the capacity to produce 500,000,000 units a year but currently operates at 300,000,000 units per year. Direct material and direct labor costs are variable, and manufacturing overhead is primarily fixed. Production costs for 2020 are as follows:
Number of units produced and sold……………..300,000,000
Direct materials……………………………………………$ 15,000,000
Direct labor…………………………………………………….30,000,000
Manufacturing overhead………………………………105,000,000
Total costs…………………………………………………..$150,000,000
Equivalent cost per unit…………………………………………..$0.50
Jim Taylor, the president, receives a bonus each year based on net operating profit and would like to reduce costs in 2021 so that profit will increase. He decides to take advantage of the excess plant capacity and increase production to 350,000,000 even though he expects the company will be unable to increase unit sales in 2021.
Required
a. If Jim increases production to 350,000 units per year, what will be the new equivalent cost per unit?
b. Would increasing the production level be a good idea? Why or why not?
Enjoy 24/7 customer support for any queries or concerns you have.
Phone: +1 213 3772458
Email: support@gradeessays.com