Question

Dream Car Company Ltd designed a new model of electric car. The Company uses an 80% incremental unit-time learning model to forecast the manufacturing labour time to make a car. The estimated manufacturing data of the first car are:

Direct materials cost $400,000 per unit
Direct manufacturing labour time 800 direct labour hours
Direct manufacturing labour cost $50 per direct labour hour
Variable manufacturing overhead cost $75 per direct labour hour

Dream Car Company’s management team expects that the time required to make a car will diminish as the production team masters the necessary building techniques. In order to diversify its business, Dream Car Company establishes a company named ‘Tracy Ltd’ which produces and sells desks and chairs. Tracy Ltd sells its products in a bundle but customers can also choose to buy desks or chairs separately. Tracy Ltd’s general manager expects sales of 600 units in the coming year, consisting of 240 units of desk and 360 units of chair. The financial information is summarized asfollows:

Desk Chairs Selling price per unit $5,000 $2,500
Variable cost per unit ($3,750) ($2,050)
Contribution margin per unit $1,250 $450
Fixed costs for the coming year are expected to be $4,620,000 for the Tracy Ltd.

Required:
a Calculate the total variable costs of producing the first four cars.

b What would be the total variable costs for the first four cars if Dream Car Company changes to use an 80% cumulative averagetime learning model for predicting direct manufacturing labour time?
c How should Dream Car Company decide which model it should use? Illustrate your answer with one example.
d What are the break-even sales units of desks and chairs, assuming that the forecasted sales mix is attained?
e If Tracy Ltd wants to earn a profit of $100,000 in the coming year, how many units of desks and chairs should be sold, assuming that the sales mix remains unchanged? You should round your answer to the nearest integer.

Answer 1