Smith Soda spends $3 on direct materials, direct labor, and variable manufacturing overhead for every unit (24-pack of soda) it produces. Fixed manufacturing overhead costs $4 million per year. The plant, which is currently operating at only 80% of capacity, produced 20 million units this year. Management plans to operate closer to full capacity next year, producing 25 million units. Management doesn't anticipate any changes in the prices it pays for materials, labor, and manufacturing overhead.
Requirements
1. What is the current total product cost (for the 20 million units), including fixed and variable costs?
2. What is the current average product cost per unit?
3. What is the current fixed cost per unit?
4. What is the forecasted total product cost next year (for the 25 million units)?
5. What is the forecasted average product cost next year?
6. What is the forecasted fixed cost per unit?
7. Why does the average product cost decrease as production increases?