Exercise 1

Step-Variable Cost and Cost Behaviour

The dairy Nature Milk Inc. produces skimmed milk and butter. The sales prices of the two products are 10 DKK/kilo for skimmed milk and 50 DKK/kilo for butter.

The dairy only has the following three costs:

1. The dairy pays the farmers 2,000 DKK/ton raw milk produced for the dairy
2. The dairy has a cost of 1,500 DKK/ton raw milk processed (manufactured)
3. The dairy uses an external company for transportation of raw milk. The external company is paid on a monthly basis depending on the total transported ton of raw milk per day:

• 1,200,000 DKK/month if total ton is between 0 and 499 per day
• 2,400,000 DKK/month if total ton is between 500 and 999 per day
• 3,600,000 DKK/month if total ton is between 1,000 and 1,499 per day
• Etc.

The transportation cost is considered a fixed cost in dairy.

The dairy is currently producing and transporting 1,300 tons per day, and there are 20 work days per month. Processing one ton of raw milk results in 950 kilos of skimmed milk and 50 kilos of butter.

Exercise 1.1 Variable Costs

Determine the variable cost of buying and processing one ton of raw milk.

Exercise 1.2 Fixed Costs

• Determine the current fixed cost per month.
• Determine the current fixed cost per ton of raw milk transported and processed.

Exercise 1.3 Unit Costs

Determine the total unit cost (variable cost + fixed cost) for the processing and transportation of 1,300 and 1,700 ton of raw milk, respectively. Is there a difference in unit cost? Why?

Exercise 1.4 Profit

What is the dairys profit per ton of raw milk processed (into skimmed milk and butter), including transportation at the level of 1,300 tons per raw milk transported per day?

Exercise 1.5 Relevant Range

Describe the term relevant range with 2-3 sentences.