question archive Doorbell Candles manufactures candle holders and sells them in a competitive market at $8 each
Doorbell Candles manufactures candle holders and sells them in a competitive market at $8 each
Subject:AccountingPrice:2.87 Bought7
Doorbell Candles manufactures candle holders and sells them in a competitive market at $8 each. There is a specialized machine for producing the holders. The production capacity of the machine is 4,400 candle holders per month. The machine costs $70,000 and is depreciated using straight-line depreciation over 5 years assuming zero residual value. When only one machine is used, rent for the factory space and warehouse is $1,300 per month.
In the current year, Doorbell makes and sells 3,100 candle holders per month. Doorbell buys materials at the beginning of each month to make the candle holders it needs to sell. Materials cost 10 cents per holder. Production workers are paid at a piece rate of $2 per holder.
Next year Doorbell expects demand to increase by 100%. At this volume of materials purchased, it will get a bulk purchase discount of 10%. Doorbell will buy an identical machine at the same cost (same depreciation policy) to meet the increase in demand. The landlord agrees that rent for the factory space and warehouse is still $1,300 per month as long as Doorbell pays an ad- valorem rent of 3% on overall output if a second machine is used on the factory premises.
a) Calculate and explain Doorbell's annual relevant range of output with respect to cost behaviors for the current year?
b) Calculate and explain Doorbell's annual relevant range of output with respect to cost behaviors for the next year?
Purchase A New Answer
Custom new solution created by our subject matter experts
GET A QUOTE
Answer Preview
Answer:
a)
| Doorbell's current annual relevant range of output is 0 to 52,800 units. |
| Monthly production capacity is 4,400 units. Therefore, annual capacity is 4,400 x 12 = 52,800 units. |
| Doorbell's current annual fixed manufacturing cost = $29,600 |
| Annual variable manufacturing cost = $ 78,120 |
| Annual depreciation = $ 70,000 / 5 = $ 14,000 |
| Annual rent expense = 1,300 x 12 = $ 15,600. |
| Total annual fixed manufacturing cost = $ 14,000 + $ 15,600 = $ 29,600 |
| Material cost = 3,100 x 12 x $ 0.10 = $ 3,720. |
| Labour cost = 3,100 x 12 x $ 2 = $ 74,400. |
| Total Annual variable manufacturing cost = $78,120 |
b)
| Doorbell's relevant range of output next year = 0 to 1,05,600 units. |
|
Total annual fixed cost will increase by (Depreciation)$14,000 next year. So it will be $ 43,600. |
| Total annual variable costs will increase by $ 77,376 ($1,55,496-$78,120) next year. |
| Next year, the company plans to sell 6,200 units per month. As the current capacity of the machine is only 4,400 per month, a second machine would be needed to worker to the additional demand. Therefore the maximum production possible is 4,400 x 2 x 12 = 105,600 units. |
| Material costs next year : $ ( 0.10 - 10 % ) x 6,200 x 12 = $ 6,696 |
| Labour costs next year : 6,200 x 12 x $ 2= $ 1,48,800 |
| Total Annual variable manufacturing cost = $1,55,496 |
