Question

McGovern is a car manufacturing company. It builds 2 types of cars: a sports car and a sports utility vehicle (SUV). Its vehicles are very popular among its customers. Recently, increased demand for both vehicles has caused the company to revisit its total number of cars to produce and unit costs for those vehicles. Each sports car generates 10 kilowatt hours of energy to be produced and each SUV requires 20 kilowatt hour of energy to be produced. Each kilowatt hour costs .25. The following chart breaks down McGovern’s expenses for producing the companies. Presume the production of the sports car and SUV’s are split equally between the two vehicles.

Operating Costs Amount Insurance…………………………………………… $6,000 per month Rent………………………………………………… $15,000 per month

Salaries……………………………………………… $30,000 per month

Electricity……………………….…………………..... Sports car: 10 kilowatt hours of energy SUV: 20 kilowatt hours of energy

Shipping costs…………………………..................... Sports cars: $1,000 for the first 2000 sports car shipped + 1 dollar per each additional vehicle shipped SUV: $1,000 for the first 1500 SUV shipped + 1.50 dollars per each additional vehicle shipped

McGovern normally produces 2000 sports cars and 1500 SUV’s. The increased demand has the company estimating production needing to increase to 3500 sports cars and 3000 SUV’s. However, McGovern has the capacity to produce 5000 sports cars and 4000 SUV’s.

For this assignment, please do the following:

1. Develop a graphical analysis of the operating costs in relation to the units produced for the sports car and SUV. Following the development of the graphs, provide an explanation of your graphs discussing the relationship of the costs with respect to the number of units produced.

2. Determine the behavior per unit costs in relation to the fixed costs and variable costs and explain what takes place when you increase and decrease the number of units of the sports car and the SUV. (It may be best to create a table for each vehicle.)

3. Determine the fixed cost per unit for each vehicle if it is at normal production, production due to increased demand, and if McGovern were to produce the vehicles at maximum capacity production. After calculating the fixed cost per unit for each vehicle, provide an explanation as to what happens to the fixed costs as the number of units increase with each production increase. Please be sure to show the work done to reach your conclusions.

4. Finally, based on the cost information provided and the calculation you have performed, determine whether the company should maintain production, increase production based on demand, or produce at maximum capacity and provide an explanation as to why your selected option is the best option.

Answer 1

`		Sports Car		SUV
Units	per unit	2,000 Units	per unit	1,500 Units
Operating costs
Energy consumption	2.50	$5,000	5.00	$7,500
Insurance	1.50	$3,000	2.00	$3,000
Rent	3.75	$7,500	5.00	$7,500
Salaries	7.50	$15,000	10.00	$15,000
Shipping costs	0.50	$1,000	0.67	$1,000
		31,500		34,000

The per unit cost of fixed cost will decrease with increase in production and the variable cost, which is the energy consumption will increase with increase in production and vice versa in case of decreae in production. Shipping cost will increase for every unit by 1.5$ beyond 2000 for  Sports car and 1500 units for SUV's.

2. Cost behaviour when increase in production

`		Sports Car		SUV
Units	per unit	2,500 units	per unit	2,000 units
Operating costs
Energy consumption	2.50	$6,250	5.00	$10,000
Insurance	1.20	$3,000	1.50	$3,000
Rent	3.00	$7,500	3.75	$7,500
Salaries	6.00	$15,000	7.50	$15,000
Shipping costs	0.70	$1,750	0.88	$1,750
		33,500		37,250

Cost behaviour when decrease in production

`		Sports Car		SUV
Units	per unit	1,500 units	per unit	1,000 units
Operating costs
Energy consumption	2.50	$3,750	5.00	$5,000
Insurance	2.00	$3,000	3.00	$3,000
Rent	5.00	$7,500	7.50	$7,500
Salaries	10.00	$15,000	15.00	$15,000
Shipping costs	0.67	$1,000	1.00	$1,000
		30,250		31,500

3. Cost behaviour at maximum capacity

`		Sports Car		SUV
Units	per unit	5,000 units	per unit	4,000 units
Operating costs
Energy consumption	2.50	$12,500	5.00	$20,000
Insurance	0.60	$3,000	0.75	$3,000
Rent	1.50	$7,500	1.88	$7,500
Salaries	3.00	$15,000	3.75	$15,000
Shipping costs	1.10	$5,500	1.19	$4,750
		43,500		50,250

4. To say which level is optimim for production depends how market is able to absorb the production. if there is high demands and market can absorbs all of the volumes then it is suggested that McGovern manufacture at maximum capacity