Question

Dotball Candies manufactures​ jaw-breaker candies in a fully automated process. The machine that produces candies was purchased recently and can make 4,300 per month. The machine costs $7,000 and is depreciated using straight line depreciation over 10 years assuming zero residual value. Rent for the factory space and warehouse and other fixed manufacturing overhead costs total $900 per month. Dotball currently makes and sells 3,800 ​jaw-breakers per month. Dotball buys just enough materials each month to make the​ jaw-breakers it needs to sell. Materials cost 20 cents per​ jaw-breaker. Next year Dotball expects demand to increase by​ 100%. At this volume of materials​ purchased, it will get a​ 10% discount on price. Rent and other fixed manufacturing overhead costs will remain the same.

1.	What is Dotball​'s current annual relevant range of​ output?
2.	What is Dotball​'s current annual fixed manufacturing cost within the relevant​ range? What is the annual variable manufacturing​ cost?
3.	What will Dotball​'s relevant range of output be next​ year? How if at​ all, will total annual fixed and variable manufacturing costs change next​ year? Assume that if it needs to Dotball could buy an identical machine at the same cost as the one it already has.

Answer 1

1 Dotball Candies annual relevant range of output is the maximum peak of production of its machine:

•4,300 units a month, so it would be any value between 51600 and 0

2. Dotball Candies current annual fixed manufacturing cost within the relevant range is the total of sum of fixed costs plus the amount of depreciations which are :

900*12 + (7000/10) = 10800+700= 11500

.current annual variable manufacturing cost is the current level of production 3800 units times its cost

= 3800*.2*12= 9120

3.

so, the relevant range of output next year will be according to the 100% increase in our

demand which goes from 3,800 units to 7,600 next year. So they are units per month, which

are 91,200 units a year. But if its machine produces 4,300 units top, per month, we will need

to spend another $7,000 in another machine that has to compensate the effort of increasing

the production. So the real relevant range in this case will be: 4,300·2·12= 103200 units a year.

  

Moreover, the variable cost will decrease by 10% due to the large demand although fixed

costs will remain as usual so: VMC: [7600·($0.20·0.9)]*12=$16416 and FC: ($1,200·12m)+2·($7,000:10y)= $14,400+$1,400= $15800

To sum up: if we want to satisfy all the demand available, we can buy a machine and obtain

VCM: $16416 and FC: $15800. Nevertheless, if the company does not want to buy a new

machine, it could produce at its maximum level of production where fixed costs will remain

as usual: $15,800 and the variable manufacturing costs will increase just by the increase in

the production: (4,300·$0.20)·12=$10320