Question

QUESTION 7

1. an organization 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.

   1. What is total variable cost for producing each unit of toy car?
   2. 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?
   3. 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.

Answer 1

Solution:

A)

B)

By renting the equipment the company will reduce its cost by $12000. Hence it is a viable option.

C)

Here the company is starting a new product line, so it means that it is going to stay for long. Hence it is justified that all traceable costs are treated as relevant costs. This helps in the proper pricing of the new product and the existing product.

On the other hand the company can also choose to just take the variable cost of production of the new line of business, and sell the new product at competitive prices and keep the prices of the existing product intact.

The business needs to take a call considering the pros and cons of the market situation.

Hope this helps! In case of any clarifications, kindly use the comment box below