Question

Plastic Glow Company makes glow sticks. It uses a process costing system and has had a just-in-time inventory policy. The plant has a capacity to produce 500,000 units a year but currently operates at 300,000 units per year. Direct material and direct labor costs are variable and manufacturing overhead is primarily fixed. Production costs for 2011 are as follows:
Number of units produced and sold......... 300,000
Direct materials.................. $ 15,000
Direct labor.................. 30,000
Manufacturing overhead............. 105,000
Total costs.................... $150,000
Equivalent cost per unit.............. $0.50
Glow sticks are a novelty item with high competition, and the market is very price sensitive. Jim
Taylor, the production manager, receives a bonus each year based on the gross margin (sales price per unit less cost per unit) on glow sticks. Jim is worried about a potential sales price reduction in 2012 and, as a result, feels a need to reduce costs. He decides to take advantage of the excess plant capacity and increase production to 350,000.

Required
a. If Jim increases production to 350,000 units per year, what will be the new equivalent cost per unit?
b. Would increasing the production level be a good idea? Why or why not?



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  • CreatedSeptember 13, 2013
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