Question

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?

 

Answer 1

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)