Salvay Company is a small manufacturer that produces and sells one product for use in medical instruments. Demand is erratic and can vary widely from year to year. The financial managers at Salvay are planning for the coming year and have asked for your help in forecasting unit costs and gross margin. Stacy Choo, the cost accountant at Salvay, provides you with information about the components of manufacturing costs along with specifying the behavior of the components. This information is summarized in the memo that follows: Salvay Company Memo: To: Jorge Alcala, Controller From: Stacy Choo, Cost Accountant Date: November 3. Subject: Cost Information Projections As you requested, the following table summarizes our best estimates for manufacturing costs for the upcoming fiscal year. These estimates are valid for any reasonable range of production. Cost Category Direct costs: Materials Cost Behavior Semi-variable Cost Information If production volume is below 550,000 units, we can source all our materials from Bourke Supplies at $3.00 per unit. This is a negotiated price. For any production greater than this, we will have to pay the going market price of $4.80 per unit. $4.50 per unit. Labor Variable Overhead: Indirect plant labor Variable $2.25 per unit. Indirect plant supplies Variable $1.25 per unit. Machine depreciation Fixed $218,000 per year. Plant depreciation Fixed $102,000 per year. Plant maintenance Step Plant supervision Step Plant utilities Step Property taxes on plant Fixed $105,000 per shift. $280,000 per shift. $210,000 for production up to 800,000 units; $350,000 (total) if production is over 800,000 units. $65,000 per year. Stacy also tells you that the company has a zero-inventory policy and all projections are made under that assumption. Finally, she points out that capacity constraints require assuming a second shift for the year if annual production volume exceeds 600,000 units. The marketing manager tells you that the best estimate of the price of the product is $20 per unit. His best guess is that demand could be as low as 500,000 units or as high as 750,000 units.