Question

Given the following information:

Deluxe Homes is a residential Home Builder. Based on their current production of 300 homes per year, their costs per unit are:

(in $’000)

Direct labour                          $ 20

Direct materials                      200

Variable overhead                      30

Fixed overhead                           40

Variable selling costs                  10

Fixed selling costs                       10

Total cost per unit                  $310

Required

Each of these are separate situations:

1. What is the cost per unit if production is increased to 400 homes per year, and there is an increase of $3.50 million in total fixed costs?

2. What is the cost per unit if production is decreased to 270 homes per year, and there is a decrease of $2.04 million in total fixed costs?

Answer 1

Case A: Total cost per unit = $ 3,06,250

Cost Sheet can be drawn as below (for 400 units)

Particulars	Cost per Unit	Workings	Total Cost
Direct Labour	20	20,000 x 400	8,000,000
Direct Material	200	200,000 x 400	80,000,000
Variable Overhead	30	30,000 x 400	12,000,000
Variable Selling Cost	10	10,000 x 400	4,000,000
Fixed Selling Cost and Overhead		see note below	18,500,000
Total Cost			122,500,000
Total Cost per unit		122,500,000 / 400	$ 306,250

Note:

Total Fixed Overhead Prior to the increase is 40,000 x 300 = 12,000,000

Total Fixed Selling Cost prior to increase 10,000 x 300 = 3,000,000

Hence total Fixed cost was 12,000,000 + 3,000,000 = 15,000,000

Now the cost has increased by 3,500,000

So revised fixed cost = 15,000,000 + 3,500,000 = $ 18,500,000

Case B: Total cost per unit = $ 3,08,000

Cost Sheet can be drawn as below (for 270 units)

Particulars	Cost per Unit	Workings	Total Cost
Direct Labour	20	20,000 x 270	5,400,000
Direct Material	200	200,000 x 270	54,000,000
Variable Overhead	30	30,000 x 270	8,100,000
Variable Selling Cost	10	10,000 x 270	2,700,000
Fixed Selling Cost and Overhead		see note below	12,960,000
Total Cost			83,160,000
Total Cost per unit		83,160,000 / 270	$ 308,000

Note:

Total Fixed cost was 12,000,000 + 3,000,000 = 15,000,000 [as calculated above in Case A]

Revised Fixed cost is 15,000,000 - 2,040,000 = $ 12,960,000