Question

The Moore Division of Block C Enterprises manufactures and sells specialty semiconductors. Moore sells 1350 of one of these specialized semiconductors each month at a price of $1200 each. Variable costs amount to $1,000,000, and fixed costs are $400,000. Currently Moore has a defect rate of 6 percent (which are chips returned by customers, scrapped, or replaced). Note that the variable costs include the cost of producing the defective chips. Calculate the hidden cost associated with producing this semiconductor.

**please explain how this was calculated.

Options:

	$50402
	$60542
	$70385
	$80533
	$90358
	$100406
	$110122
	$120083

Answer 1

Moore division need to sell net of Qty. of 1350, it has defect rate of 6% (which chips are returned of total sells) it means Moore division need to produce total 1436.17 ((1350*100)/(100-6) (including defected units), So Moore division will produce total 1437(rounding off) units of the semi-conductor.

Now total variable cost is 10,00,000 and variable cost per unit is 695.89 (10,00,000/1437)

So hidden cost is Rs. 60,542 for producing semi-conductor (for additional units of 87 (1437-1350) at the rate of 695.89.)

Note: Hidden cost is 87 units * 695.89 = which is 60542.

Further note that fixed cost not to be included in manufacturing extra 87 units as fixed cost are not variable with producing extra units. It has to occur anyways.