Question

ASSIGNMENT #1

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 kilowat 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