She had always wanted to start his own business and felt that the ability to produce the G-52 component at a lower cost might provide this opportunity. UEC's purchasing agent assured She that the company would be willing to buy G-52s from She if the price were 10-15 percent below UEC’s current cost of $52 per unit. Working at home, She experimented with the new methods, which were based on the use of a new fixture to aid in assembling each G-52. This experimentation seemed successful, so She proceeded to prepare some estimates for large-scale G-52 production. He determined the following:

1. A local toolmaker would make the new fixtures for a price of $15,750 each. One fixture would be needed for each assembly worker.
2. Assembly workers were readily available, on either a full-time or part-time basis, at a wage of $117.50 per hour. She felt that another 20 percent of wages would be necessary for fringe benefits. She estimated that on average (including rest breaks), a worker could assemble, test, and pack 15 units of the G-52 per hour.
3. Purchased components for the G-52 should cost about $26.80 per unit over the next year. Shipping supplies and delivery costs would amount to approximately $1.60 per unit.
4. Suitable space was available for assembly operations at a rental of $19,000 per month. A 12-month lease was required.
5. Assembly tables, stools, and other necessary equipment would cost about $9,450 per assembly worker.
6. She, as general manager, would receive a salary of $63,000 per month.
7. A combination office manager book-keeper was available for a salary of $22,000 per month.
8. Miscellaneous costs, including maintenance, supplies, and utilities, were expected to average about $15,000 per month.
9. UST Electronics would purchase between 400,000 and 525,000 units of G-52 a year, with 450,000 being UEC’s purchasing agent’s “best guess.” However, She would have to commit to a price of $44.50 per unit for the next 12 months.

She showed these estimates to a friend who was a cost analyst in another electronics firm. This friend said that all of the estimates appeared reasonable, but told Her that in addition to the required investment in fixtures and equipment, about $2,200,000 would be needed to finance accounts receivable and inventories. The friend also advised buying enough fixtures and other equipment to enable producing the maximum estimated volume (525,000 units per year) on a one-shift basis (assuming 2,000 labor hours per assembler per year). She thought this was good advice.

Questions:

For questions 1 to 3, limit your answers to cash costs, ignore depreciation of fixtures and equipment, and disregard any interest costs She might incur on borrowed funds.

1. What are Her expected variable costs per unit? Fixed costs per month? What would the total costs per year of She’s business be if the volume were 400,000 units? 450,000 units? 525,000 units?

2. From Question 1, what is the average cost per unit of G-52 at each of these three volumes? What would be the break-even point in units?

3. Reanswer Questions 1 and 2 assuming that (a) She must guarantee assembly workers 2,000 hours of pay per year; (b) enough workers would be hired to assemble 450,000 units a year; (c) these workers could work overtime at a cost (including fringes) of $211.50 per hour, and (d) no additional fixed costs would be incurred if overtime were needed. (Still limit yourself to cash costs; ignore depreciation of fixtures and equipment. Also, disregard any interest costs She might incur on borrowed funds. No need to calculate the break-even point.)

4. Reanswer Questions 1 and 2, now including depreciation as an expense but not considering conditions mentioned in Question 3 and excluding interest costs. Assume the fixtures and other equipment would be purchased based on a suggestion from Wong's friend and have a useful life of six years, and that straight-line depreciation will be used.