Company ABC produces toys for many shops. Due to its excess capacity, the company tries to...

Company ABC produces toys for many shops. Due to its excess capacity, the company tries to start a new product line to manufacture a new toy car model. The company has gathered the following information on the product line from which the company can make 1,000 toy cars. For each toy car, the direct materials cost $60, direct labor costs $40, and total manufacturing overhead costs $20. Due to the excess capacity, producing the new toy car has no impact on fixed manufacturing overhead. However, a total of $10,000 fixed manufacturing overhead is absorbed by this new product line under the company’s absorption costing system.

What is total variable cost for producing each unit of toy car?
The company is considering renting a new equipment to produce the new toy cars. The rental fee for producing 1,000 toy cars is $40,000. The new equipment will effectively reduce each toy’s direct labor cost by 30%, direct materials cost by 50%, and variable manufacturing overhead by 50%. Is it worthwhile for the company to rent the new equipment?
The company’s accountant has successfully traced many costs to each unit of the new toy car. She also wonders whether she should simply record all of the traceable costs as relevant costs. What is your opinion? Please support your answer with explanation.

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ekkarill92 answered 1 year ago

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