Question

Kelly Kneppy owns a company that manufactures and sells camping equipment and outdoor

gear. Kelly’s latest creation is the Bear-B-Gone, a tent constructed of Kevlar and reinforced steel

mesh that could theoretically protect campers (who hadn’t followed appropriate food storage

guidelines) from bear attacks. Kelly believes the Bear-B-Gone offers many of the same desirable

features as other tents on the market, and that this extreme safety feature will make it one of the

best-selling tents in short order.

Kelly can make the Bear-B-Gone with one of two available technologies. The first is a labor-

intensive process, that if chosen will require $600,000 per year in fixed overhead costs, and the

following in variable costs of production per unit: direct materials of $75, direct labor of $75,

and overhead of $20. The second technology is a more automated (machine-dependent) process,

that if chosen will require $2,000,000 per year in fixed overhead costs, and the following in

variable costs of production: direct materials of $75, direct labor of $5, and overhead of $60.

Kelly believes she can sell the tent for $200.

5) Suppose Kelly decided to go with the labor-intensive process. Suppose also that, in the

first year of operations, Kelly produces 80,000 tents and sells 65,000. What is the unit

product cost of the tents under variable costing? Under absorption costing? If Kelly

prepared GAAP-compliant financial statements in order to share with potential investors,

would her “over” production make her appear more or less profitable (or no different) as

compared to if production had been equal to sales at 65,000 units?

Answer 1

Answer with working is given below