Step Costs, Relevant Range

Bellati Inc. produces large industrial machinery. Bellati has a machining department and a group of direct laborers called machinists. Each machinist can machine up to 500 units per year. Bellati also hires supervisors to develop machine specification plans and oversee production within the machining department. Given the planning and supervisory work, a supervisor can oversee, at most, three machinists. Bellati's accounting and production history shows the following relationships between number of units produced and the annual costs of supervision and materials handling (by machinists):

Units Produced	Direct Labor			Supervision
0500	$ 36,000			$ 48,000
5011,000	72,000			48,000
1,0011,500	108,000			48,000
1,5012,000	146,000			80,000
2,0012,500	180,000			80,000
2,5013,000	216,000			80,000
3,0013,500	252,000			120,000
3,5014,000	288,000			120,000

Required:

1. On your own paper, prepare a graph that illustrates the relationship between direct labor cost and number of units produced in the machining department. (Let cost be the vertical axis and number of units produced be the horizontal axis.) Would you classify this cost as a strictly variable cost, a fixed cost, or a step cost?

Fixed costStep costVariable costStep cost

2. On your own paper, prepare a graph that illustrates the relationship between the cost of supervision and the number of units produced. (Let cost be the vertical axis and number of units produced be the horizontal axis.) Would you classify this cost as a strictly variable cost, a fixed cost, or a step cost?

Fixed costStep costVariable costStep cost

3. Suppose that the normal range of production is between 1,400 and 1,500 units and that the exact number of machinists are currently hired to support this level of activity. Further suppose that production for the next year is expected to increase by an additional 500 units. What is the increase in the cost of direct labor? Cost of supervision?

Cost of direct labor $

Cost of supervision $