Question

Walker Boat Company produces bass boats. The following comments were found in the “Management’s Discussion and Analysis” section of the annual reports.

“Bass boat production includes a significant amount of robotic manufacturing costs, which do not vary with production levels.”

a. What effect would the change in level of boats produced have on the total robotic costs?

b. What effect would the change in level of boats produced have on the unit costs of the boats?

c. From the external reporting point of view, how would your answer to (b) possibly lead to unethical behavior by management anxious to produce a better bottom-line this period? (Not that Cost of Goods Sold, an expense item on the Income Statement, is a function of units SOLD, not produced).

Answer 1

In this case boss boat productions are having significant manufacturing cost which do not vary with production level, We can call them as fixed cost as well. Assuming that most of the production cost is robotics manufacturing cost.

a ) Total robotic cost will definitely depend on number of units produced, since total robotic cost = Numbers of units produced * manufacturing cost per unit.

Total cost of robotics will vary along with change in production level of robotics.

b ) since the manufacturing cost per unit is fixed , It doesn't vary along with change in production level of robotics. Change in level of production doen't effect unit cost of the boats.

c ) with the fixed amount of manufacturing units will definitely have certainty in manufacturing cost.So that management can plan accordingly to get better bottom line by acquiring less fixed costs.

Actually manufacturing costs should be variable cost , if that so manufacturing costs would be variable and will change according to level of production level.