Dawn and Sons handcraft two varieties of "squirrel proof" bird baths - small and large. Each small bath takes 4 hours of labor while each large unit uses 6 hours of labor. The firm currently makes 20,000 small and 10,000 large bird baths, using a total of 140,000 labor hours. Annual fixed costs amount to $2,100,000.
Required:
a. Suppose Dawn and Sons change their product mix to produce 15,000 units each of the small and large bird baths. What are their expected fixed costs per year, in the long run? (Calculate an overhead rate per labor hour based on current costs and labor hours).
b. Repeat part (a) assuming that Dawn and sons estimate long run costs in proportion to the number of units made and not as related to the number of labor hours. That is, they use a rate per unit (and not the rate per labor hour) to project future costs.