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

Explanation:

 

COMPUTATION OF TOTAL COST OF PRODUCTION & COST PER UNIT

Part a

All amounts are in $

 

Particulars	1,000 units	2,000 units
Direct Materials	28,800	57,600
Direct labour	28,000	56,000
Building Cost	18,000	18,000
Leased machine	1,200	2,400
Store Cost	6,000	9,000
Total Cost	82,000	143,000
Cost per Unit (Total Cost/Units)	82	71.5

Note :

1. Direct Material

1,000 units = 6 x 4.8 x 1,000 = 28,800

2,000 units = 6 x 4.8 x 2,000 = 57,600

2. Direct Labour

1,000 units = 4 x 7 x 1,000 = 28,000

2,000 units = 4 x 7 x 2,000 = 56,000

3. Leased machine

1,000 units = 2 machines at 600 = 1,200

2,000 units = 4 machines at 600 = 2,400

4. Store Cost

1,000 units = 3 x 1,000 + 3,000 = 6,000

2,000 units = 3 x 2,000 + 3,000 = 9,000

Part b :

Cost per unit is 82 at production level of 1,000 and Cost per unit is 71.5 at production level of 2,000.

The cost per unit has reduced when the production level has increased. This is due to the presence of Fixed Cost in the cost structure. These cost doesn't increase with the level of output thus leading to decrease in the cost per unit. (Fixed costs are 18,000 for building and 3,000 in store cost).

The cost per unit is different at each level of production because there are certain costs like building costs, leased machine cost, store cost which are fixed costs in nature and do not vary at constant rate with the production level.

Part a).Total cost of production for 1000 units= $82,000

              cost per unit      = $82.00

          Total cost of production for 2000 units =$143,000

               cost per unit  =$71.50

Part b).

Cost per unit is 82 at production level of 1,000 and Cost per unit is 71.5 at production level of 2,000.

The cost per unit has reduced when the production level has increased. This is due to the presence of Fixed Cost in the cost structure. These cost doesn't increase with the level of output thus leading to decrease in the cost per unit. (Fixed costs are 18,000 for building and 3,000 in store cost).