Grand-Cola spends $1 on direct materials, direct labour, and variable manufacturing over- head for every unit (12-pack of soda) it produces. Fixed manufacturing overhead costs $6 million per year. The plant, which is currently operating at only 85% of capacity, produced 15 million units this year. Management plans to operate closer to full capacity next year, producing 20 million units. Management does not anticipate any changes in the prices it pays for materials, labour, or manufacturing overhead.
Requirements
a. What is the current total product cost (for the 15 million units), including fixed and variable costs?
b. What is the current average product cost per unit?
c. What is the current fixed cost per unit?
d. What is the forecasted total product cost next year (for the 20 million units)?
e. What is the forecasted average product cost next year?
f. What is the forecasted fixed cost per unit?
g. Why does the average product cost decrease as production increases?