John Smith, president of Furman Enterprises, remembers from his first accounting course that to calculate the unit
Question:
John Smith, president of Furman Enterprises, remembers from his first accounting course that to calculate the unit cost you divide the total cost by the number of units produced. In reviewing a recent production report, he noticed that fixed overhead per unit was higher than he expected. He has ordered the production department to increase production in the coming months by 15% so that the overhead costs are spread over more units, which will lower the unit cost. He believes that this action will result in a higher gross margin per unit and increase the company's profitability. He brings his idea to you, the production manager.
Do you think his suggestion is a good one? Why or why not?
Fundamentals of Corporate Finance
ISBN: 978-0077861629
8th edition
Authors: Richard Brealey, Stewart Myers, Alan Marcus