(Cost behavior: advanced) L. Olson Ink makes stationery sets of 100 percent rag content edged in 24 karat gold. In an average month, the firm produces 40,000 boxes of stationery; each box contains 100 pages of stationery and 80 envelopes. Production costs are incurred for paper, ink, glue, and boxes.

The company manufactures this product in batches of 500 boxes of a spe¬ cific stationery design. The following data have been extracted from the company’s accounting records for June 2006:

Overhead charges total $408,000 per month and are considered fully fixed for purposes of cost estimation.

a. What is the cost per box of stationery based on average production volume?

b. If sales volume increases to 60,000 boxes per month, what will be the cost per box (assuming that cost behavior patterns remain the same as in June)?

c. If sales are 60,000 boxes per month but the firm does not want the cost per box to exceed its current level [based on part (a)], what amount can the company pay for labor design costs, assuming all other costs are the same as June levels?

d. Assume that L. Olson Ink is now able to sell, on average, each box of stationery at a price of $300. If the company is able to increase its vol¬ ume to 60,000 boxes per month, what sales price per box will generate the same gross margin that the firm is now achieving on 40,000 boxes per month?

e. Would it be possible to lower total costs by producing more boxes per batch, even if the total volume of 40,000 is maintained? Explain.LO1. 

Transcribed Image Text:

Cost of paper for each batch Cost of ink and glue for each batch Cost of 500 gold boxes for each batch Direct labor for producing each batch Labor costs for each batch design $10,000 1,000 32,000 16,000 40,000