The Cost Structure of Sackville Manufacturing Company (SMC)at Two Levels

question 111

Essay

The cost structure of Sackville Manufacturing Company (SMC)at two levels of production is as follows:
$\begin{array}{|l|r|r|}\hline \text { Units } & 60,000 & 80,000 \\\hline \text { Costs: } & \\\hline \text { Direct materials } & \$ 120,000& \$ 160,000 \\\hline \text { Direct labour } & 90,000 & 120,000 \\\hline \text { Factory overhead } & 216,000 & 248,000 \\\hline \text { Total costs } & \$ 426,000 & \$ 528,000 \\\hline \text { Average cost per unit } & \$ 7.10& \$ 6.60\\\hline\end{array}$
Required:
a.Classify and explain each production cost as either strictly variable or strictly fixed or mixed
b.Determine the total production cost equation for SMC,using the units of production as the cost driver.(Be sure to identify clearly all the separate components of the equation.)
c.Explain what causes the drop in average cost per unit from $7.10 to $6.60 when production is increased from 60,000 to 80,000 units.Show all supporting calculations.

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