In: Accounting

Cost of Production and Cost per Unit

A business produces one product which requires the following inputs:
Direct Materials 6 kg at $ 4,80 per kg
Direct labour 4 hour at $7 per hour
Building cost $18.000 per period
Leased machine $600 for every 600 units (each machine has a capacity of 600 units)
Store Cost $3.000 per period plus $3 per unit
a. What is the total cost of production and the cost per unit at each of the following
production levels?
-1000 units
-2000 units
b. Explain why the cost per unit is different at each level of production?



Expert Solution

i) Total Cost of Production          
    Production Level    
    1,000   2,000    
  Direct Material $28,800  (6x4.8x1,000) $57,600  (6x4.8x2,000)  
  Direct Labor $28,000  (4x7x1,000) $56,000  (4x7x2,000)  
  Building Cost $18,000    $18,000     
  Leased Machine $1,200  (600x2) $2,400  (600x4)  
  Store Cost $6,000  (3,000+(3x1,000) $9,000  (3,000+(3x2,000)  
  Total Cost of Production 83,000   145,000    
  Cost Per Unit $83.00  (83,000/1,000) $72.50  (145,000/2,000)  
ii) In the each level of production the cost per unit is different due to the variable cost are change with respect to the level of production but at the same time period cost are not change irrespective of level of production,hence when increase in production level cost per unit will decrease .  

Cost Per Unit $83.00  (83,000/1,000) $72.50  (145,000/2,000)

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