Question

A company has no beginning inventory and sales are estimated to be 20,000 units at $75 per unit. Also assume that sales will not change if more than 20,000 units are manufactured. My question is in manufacturing cost how did the variable unit cost become $35 and the fixed $20?

Answer 1

Variable Cost: This is a cost which is incurred for eache addittional unit of production. So it means there are production of 20,000 units and for producing the 20,000 units we require variable cost per unit is $ 35

i.e Total Varialbe cost = 20,000 Units X $ 35 = $ 700,000

Variablce cost included Direat Material Cost + Direct Labour Cost + Variable OVerhead cost Per units .

So variable unit Cost $ 35 is arrived by total of all Variable Expense.

Fixed Expenses: These are the total fixed expenses where you produced Single unit or 20,000 unit. In the given cash fixed cost is $ 20 it means total fixed cost is 20,000 unit X $ 20 = $ 400,000 . So if we can produced 10,000 unit or 30,000 unit the fixed cost will remain same. But recovery overhead rate will change as per the production . Example:

If we can produced only 10,000 unit than fixed overhead = $ 400,000 / 10,000 units = $ 40 Per unit

And when we can produced 40,000 unit than the fixed overhead per unit = $ 400,000 / 40,000 unit = $ 10 Per unit