(Cost behavior) Ann’s Papers & Pads makes stationery pads. In an average month, the firm produces 200,000 boxes of stationery; each box contains 50 pages of stationery and 40 envelopes. Production costs are incurred for paper, ink, glue, and boxes. The company manufactures this product in batches of 500 boxes of a specific stationery design. The following data have been extracted from the company’s accounting records for November 1997:

Overhead charges total $20,400 per month; these 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 300,000 boxes per month, what will be the cost per box (assuming that cost behavior patterns remain the same as in November)?

c. If sales are 300,000 boxes per month but the firm does not want the cost per box to exceed its current level (based on part a above), what amount can the company pay for labor design costs, assuming all other costs are the same as November levels?

d. Assume that Ann’s Papers & Pads is now able to sell, on average, each box of stationery at a price of $5.00. If the company is able to increase its volume to 300,000 boxes per month, what sales price per box will generate the same gross margin that the firm is now achieving on 200,000 boxes per month?

e. Would it be possible to lower total costs by producing more boxes per batch, even if the total volume of 200,000 is maintained? Explain.LO1

Transcribed Image Text:

Cost of paper for each batch Cost of ink and glue for each batch Cost of 500 boxes for each batch Direct labor for producing each batch Labor costs for each batch design $12 2 31 14 40