PROBLEM 3-18. You Get What You Measure! The Plastic Glow Company makes glow sticks. It uses a process costing system and has had a just-in-time inventory policy. The plant has a capacity to produce 500,000,000 units a year but currently operates at 300,000,000 units per year. Direct material and direct labor costs are variable, and manufacturing overhead is primarily fixed. Production costs for 2017 are as follows:

Number of units produced and sold 300,000,000

Direct materials $ 15,000,000

Direct labor 30,000,000

Manufacturing overhead 105,000,000

Total costs $150,000,000

Equivalent cost per unit $0.50

Jim Taylor, the president, receives a bonus each year based on net operating profit and would like to reduce costs in 2018 so that profit will increase. He decides to take advantage of the excess plant capacity and increase production to 350,000,000 even though he expects the company will be unable to increase unit sales in 2018.

Required

a. If Jim increases production to 350,000 units per year, what will be the new equivalent cost per unit?

b. Would increasing the production level be a good idea? Why or why not?

P3-18	Plastic Glow Company
	Number of units produced & sold:	300,000,000
		Total Cost	Per Unit Cost
	Direct Material
	Direct Labor
	Manufacturubg Overhead
	Total
		Cost per unit	0.50
a.	If Jim increases production (but no expected increase in sales):
	Number of units produced:	350,000,000
		Total Cost	Per Unit Cost
	Direct Material
	Direct Labor
	Manufacturubg Overhead
	Total
	Difference in per unit cost:
b.	Would increasing the production level be a good idea? Yes/No and explain why.
	Hint: what does this do to the Return on Assets ratio?