Horton and Associates Produces Two Products Named BigBlast and LittleBlast

question 61

Multiple Choice

Horton and Associates produces two products named BigBlast and LittleBlast. Last month 4,000 units of BigBlast and 1,000 units of LittleBlast were produced and sold. Following are average prices and costs for last month: $\begin{array}{lrr}&\text { BiqBlast }&\text { LittleBlast }\\\text { Selling price } & \$ 100 & \$ 200 \\\text { Direct materials } & (25) & (75) \\\text { Direct labour } & (15) & (35) \\\text { Variable overhead } & (5) & (30) \\\text { Product line fixed costs } & (10) & (40) \\\text { Corporate fixed costs } & (25) & (25) \\\text { Average margin per unit }&\$20&\$5\end{array}$ The production lines for both products are highly automated, so large changes in production cause very little change in total direct labour costs. Workers who are classified as direct labour monitor the production line and are permanent employees who regularly work 40 hours per week. All costs other than "corporate fixed costs" listed under each product line could be avoided if the product line were dropped.
The following qualitative factors are relevant to Horton's decision:
I. Would dropping one product affect the sales of the other product?
II. Are all product line fixed costs completely avoidable?
III. Would layoffs affect other workers' morale?

• A) I only
• B) I and III only
• C) I, II, and III
• D) II and III only

---

Definitions:

Average Total Cost (ATC)

Total cost divided by output.

Average Variable Cost (AVC)

Variable cost divided by output.

Average Total Cost

The total cost of production divided by the quantity produced, indicating the average cost per unit of output.

Average Variable Cost

Average variable cost (AVC) refers to the total variable costs per unit of output, covering expenses that change with the level of production, such as materials and labor.