Vargas, Inc., produces industrial machinery. Vargas has a Machining Department and a group of direct laborers called machinists. Each machinist is paid $25,000 and can machine up to 500 units per year. Vargas also hires supervisors to develop machine specification plans and to oversee production within the Machining Department. Given the planning and supervisory work, a supervisor can oversee three machinists, at most. Vargas’s accounting and production history reveal the following relationships between units produced and the costs of direct labor and supervision (measured on an annual basis):

Required:
1. Prepare two graphs: one that illustrates the relationship between direct labor cost and units produced and one that illustrates the relationship between the cost of supervision and units produced. Let cost be the vertical axis and units produced the horizontal axis.
How would you classify each cost? Why?
3. Suppose that the normal range of activity is between 2,400 and 2,450 units and that the exact number of machinists is currently hired to support this level of activity.
Further suppose that production for the next year is expected to increase by an additional 400 units. How much will the cost of direct labor increase (and how will this increase be realized)? Cost of supervision?LO1

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Units Produced 0-500 501-1,000 Direct Labor Supervision $ 40,000 $ 25,000 50,000 40,000 1,001-1,500 75,000 40,000 1,501-2,000 100,000 80,000 2,001-2,500 125,000 80,000 2,501-3,000 150,000 80,000 3,001-3,500 175,000 120,000 3,501-4,000 200,000 120,000