Use the information to calculate the costs for each operating center. Management has decided to centralize the
Question:
Use the information to calculate the costs for each operating center.
Management has decided to centralize the initial processing function of our four product lines and purchase new equipment that has a 40,000-unit annual practical capacity. For budgeting and costing purposes, the initial processing function will be assigned to Center E. Shown below is the budgeted production for the product centers.
Annual Unit Production | |
Center A | 7,000 |
Center B | 9,500 |
Center C | 4,000 |
Center D | 6,000 |
A large part of the product managers’ compensation is derived from bonuses they receive for meeting or exceeding cost targets. The managers of center A through D each agree that they are responsible for the variable costs per unit that are delivered by Center E. However, they disagree about the allocation of the fixed costs of Center E. They believe that the new equipment has a much larger capacity than is necessary and they do not want to be responsible for the cost of the unused capacity. The fixed costs for Center E total $150,000, and the variable cost per unit is $6.
REQUIRED
Scenario | Cost |
1. Assuming Center E's fixed costs are allocated based on the proportion of units produced by each center, what is the per-unit cost for Center D? | |
2. Although allocating Center E's fixed costs on a per-unit produced basis seems equitable, the manager of Center C is worried that Center B will reduce output. If Center B produces only 3,000 units, what is the per-unit cost? | |
3. If Center B reduces its production to 3,000 units, by how much will Center C's per-unit cost increase or decrease? | |
4. What is Center A's per-unit cost if Center E’s fixed costs are allocated based on practical capacity? |
Cost Management Measuring Monitoring And Motivating Performance
ISBN: 9781118168875
2nd Canadian Edition
Authors: Leslie G. Eldenburg, Susan Wolcott, Liang Hsuan Chen, Gail Cook