Creating and Using a Cost Formula
Kleenaire Motors manufactures hybrid sports utility vehicles (SUVs). Kleenaire incurs monthly depreciation costs of $10,000,000 on its highly automated plant machinery and warehousing facility. Also, each SUV requires materials and manufacturing overhead resources. On average, the company uses 75,000,000 pounds of steel to manufacture 50,000 SUVs per month. Each pound of steel costs $0.20. In addition, manufacturing overhead resources are driven by machine hours. On average, the company incurs $200,000,000 of variable manufacturing overhead resources to produce 50,000 SUVs per month.
Required:
1. Create a formula for the monthly cost of SUVs for Kleenaire.
Total Cost of SUVs = Fixed cost + (Variable rate x Number of SUVs)
| Total Cost of SUVs = $ + ($ × Number of SUVs) |
2. If Kleenaire expects to manufacture 55,000 SUVs next month, what is the expected fixed cost (assuming that 55,000 units is within the company’s current relevant range)?
| $
What is the total variable cost (assuming that 55,000 units is within the company’s current relevant range)?
|
Given:
Fixed cost =$10,000,000
Material =75,000,000
Manufacturing overheads = $200,000,000
cost per pound of steel = $0.20
1) Total cost = Fixed cost +(Variable cost*Number of suv)
=$10,000,000+($4,300*50,000)
=$10,000,000+315,000,000
=$325,000,000
caluclation:
Total material cost(TMC) =75,000,000*(0.20)
= $15,000,000
TMC per unit $1=5,000,000/50,000
=$300
Manufacturing overheads(MOH) = $200,000,000
MOH per unit =$2000,000,000/50,000
= $4000
Total Variable cost(per unit) = TMC per unit+ MOH per unit
=$300+$4000
=$4,300
2) To manufacture 55,000 units
Total Manufaturing cost = Fixed cost+variable cost
=$10,000,000+$236,500,000
=$246,500,000
caluclation:
Total variable cost = variable cost per unit* no of suv
=4,300*55,000
=$236,500,000
Note :Fixed cost will never change even if we increase or decrease manufaturing.
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