Question

True Flight Golf manufacturers a popular shaft for golf clubs. Its trade secret is a unique process for weaving high-tension wire into the center of the shaft such that energy is accumulated during the swing and released at impact. A specialized machine costing $4,500,000 is utilized in the manufacturing process. The machine has a 3-year life and no salvage value. True Flight uses straight-line depreciation. During the year, 30,000 shafts were produced, and the company was operating at full capacity. $900,000 of wire was used during the year.

(a) Is machinery depreciation fixed or variable? Is wire fixed or variable?

(b) For the two noted cost items, how much was total variable cost and total fixed cost?

(c) For the two noted cost items, how much was variable cost per unit and how much was fixed cost

per unit?

(d) Repeat requirements (b) and (c), assuming production was only 18,000 units (and wire usage was

reduced proportionately).

(e) For the following year, if the company acquired an additional machine to enable production of

45,000 total units, what would happen to the expected total and per unit variable and fixed cost?

Answer 1

a)	Depreciation is a fixed cost as straight line depreciation is used.
	Wire is a variable cost.
b)	Total fixed cost = 4500000/3 = 1500000
	Total variable cost = 900000
c)	Variable cost per unit = 900000/30000 =	$        30.00	per unit
	Fixed cost per unit = 1500000/30000 =	$        50.00	per unit
d)	Total fixed cost = 4500000/3 = 1500000
	Total variable cost = 900000*18000/30000 = 540000
	Variable cost per unit = 540000/18000 =	$        30.00	per unit
	Fixed cost per unit = 1500000/18000 =	$        83.33	per unit
e)	Total variable cost would increase to the
	extent of (45000-30000)*30 =	$ 4,50,000
	Variable cost per unit will be the same =	$        30.00	per unit
	Total fixed cost would increase, depending on the
	depreciation on the additional machine bought.
	Fixed cost per unit would vary (may increase or
	decrease) depending the cost of the additional
	machinery.