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

A)

cost per unit if 400 produced=

variable cost + fixed cost

variable cost=direct labour + direct meterial+variable overhead+variable selling cost

=20,000+200,000+30,000+10,000

=260,000

fixed cost=fixed overhead +fixed selling costs +increase in total fixed cost(mentioned in above question)

fixed overhead per unit=fixed overhead/revised units x total units

40,000/400*300=30,000

fixed selling costs per unit=fixed selling cost per unit/revised units x total units

=7,500

additional fixed costs=350,000/400

=8,750

total cost=306,250

b)

cost for 270 homes

variable cost =20,000+200,000+30,000+10,000

260,000

fixed costs=fixed overhead+fixed selling cost-fixed cost on 270 homes

(40,000/270*300)+(10000/270*300)-(2,04,000/270)

=44,444+11,111-7555

=260,000+48,000

=308,000