Question

Tire and Spoke Manufacturing currently produces 1,000 bicycles per month. The following per unit data apply for sales to regular customers:

                 Direct materials                                        P50

                 Direct manufacturing labor                          5

                 Variable manufacturing overhead              14

                 Fixed manufacturing overhead                  10

                     Total manufacturing costs                   P79

The plant has capacity for 3,000 bicycles and is considering expanding production to 2,000 bicycles. What is the per unit cost of producing 2,000 bicycles?

Answer 1

Answer: 74 per unit..

For producing 2000 units,

Direct Materials: 2000*50=100,000

Direct manufacturing labour:5*2000=10,000

Variable manufacturing overhead:14*2000=28000

Fixed manufacturing overhead: 10*1000 units=10,000

Total manufacturing cost=100,00+10,000+28,000+10,000

=148,000

Total number of units produced=2000

per unit cost = 148,000/2000

=74 per unit

**Fixed manufacturing overhead will not change when production is increased from 1000units to 2000units.

Here production is below the capacity of the plant, the amount of fixed production overheads allocated to each unit of production is not increased as a consequence of low production.