Williams Company is an East Coast producer of electronic furnace air filters. A significant jump in new housing starts in the region has triggered a 25 percent increase in orders for the filter units, especially the quality model that Williams sells for $270. Six weeks after increasing production to supply the increased orders, the assistant controller notices some unusual unit cost data in the monthly report she is preparing. Prior and current month unit values are given below:

 

Required:

(1) Suggest some possible causes for the decline in average total cost.

(2) Assume now the opposite change has occurred, namely, average total cost has risen $3.96 per unit, while unit variable cost has fallen by $3.68 per unit. Suggest a possible situation to explain these changes.

Filter Average total cost Cost of last unit produced This Month $167.20 104.90 Last Month $171.14 101.22 Change -$3.96 +3.68