CHAPTER 2 - AN INTRODUCTION TO COST TERMS AND PURPOSES 2-27 Variable and Fixed Costs. Consolidated Motors specializes in producing one specialty vehicle. It is called Surfer and is styled to easily fit multiple surfboards in its back area and top-mounted storage racks. Consolidated has the following manufacturing costs: Plant management costs, $1,992,000 per year Cost of leasing equipment, $1,932,000 per year Workers wages, $800 per Surfer vehicle produced Direct materials costs: Steel, $1,400 per Surfer; Tires, $150 per tire, each Surfer takes 5 tires (one spare). City license, which is charged monthly based on the number of tires used in production: 0500 tires $ 40,040 5011,000 tires $ 65,000 more than 1,000 tires $249,870 Consolidated currently produces 170 vehicles per month. Required: 1. What is the variable manufacturing cost per vehicle? What is the fixed manufacturing cost per month? 2. Plot a graph for the variable manufacturing costs and a second for the fixed manufacturing costs per month. How does the concept of relevant range relate to your graphs? Explain. 3. What is the TOTAL manufacturing cost (VC & FC) of EACH (per) vehicle if: a) 80 vehicles are produced each month? b) 205 vehicles? c) How do you explain the difference in the manufacturing cost per unit? 2-28 Variable costs, fixed costs, relevant range. Gummy Land Candies manufactures jaw-breaker candies in a fully automated process. The machine that produces candies was purchased recently and can make 5,000 per month. The machine costs $6,500 and is depreciated using straight-line depreciation over 10 years assuming zero residual value. Rent for the factory space and warehouse and other fixed manufacturing overhead costs total $1,200 per month. Gummy Land currently makes and sells 3,900 jaw-breakers per month. Gummy Land buys just enough materials each month to make the jaw-breakers it needs to sell. Materials cost 40 per jaw-breaker. Next year Gummy Land expects demand to increase by 100%. At this volume of materials purchased, it will get a 10% discount on price. Rent and other fixed manufacturing overhead costs will remain the same. Required: 1. What is Gummy Lands current annual relevant range of output? 2. What is Gummy Lands current annual fixed manufacturing cost within the relevant range? What is the annual variable manufacturing cost? 3. What will Gummy Lands relevant range of output be next year? Calculate TOTAL annual fixed and TOTAL variable manufacturing costs for NEXT year? o (Assume that if it needs to Gummy Land could buy an identical machine at the same cost as the one it already has.) 2-32 Total and unit cost, decision making. Gayles Glassworks makes glass flanges for scientific use. Materials cost $1 per flange, and the glass blowers are paid a wage rate of $28 per hour. A glass blower blows 10 flanges per hour. Fixed manufacturing costs for flanges are $28,000 per period. Period (nonmanufacturing) costs associated with flanges are $10,000 per period and are fixed. Required: 1. Graph the fixed, variable, and total manufacturing cost for flanges, using units (number of flanges) on the x-axis. 2. Assume Gayles Glassworks manufactures and sells 5,000 flanges this period. Its competitor, Floras Flasks, sells flanges for $10 each. Can Gayle sell below Floras price and still make a profit on the flanges? 3. How would your answer to requirement 2 differ if Gayles Glassworks made and sold 10,000 flanges this period? Why? What does this indicate about the use of unit cost in decision making?