Grand-Cola spends $1 on direct materials, direct labor, and variable manufacturing overhead for every unit (12-pack of soda) it produces. Fixed manufacturing overhead costs $7 million per year. The plant, which is currently operating at only 80% of capacity, produced 25 million units this year. Management plans to operate closer to full capacity next year, producing 35 million units. Management doesn't anticipate any changes in the prices it pays for materials, labor, and manufacturing overhead.
Requirement 1. What is the current total product cost (for the 25 million units), including fixed and variable costs?
Determine the formula, then calculate the current total product cost (for the 25 million units), including fixed and variable costs.
Total variable costs + Total fixed costs = Total product costs
\$25 million + \$7 million = \$32 million
Requirement 2. What is the current average product cost per unit?
Determine the formula, then calculate the current average product cost per unit. (Enter your answer to the nearest cent.)
Current average
Total fixed costs + Current year's produced units = product cost per unit
\$7 million + 35 million = 0.2 per unit
Requirements
1. What is the current total product cost (for the 25 million units), including fixed and variable costs?
2. What is the current average product cost per unit?
3. What is the current fixed cost per unit?
4. What is the forecasted total product cost next year (for the 35 million units), including fixed and variable costs?
5. What is the forecasted average product cost next year?
6. What is the forecasted fixed cost per unit?
7. Why does the average product cost decrease as production increases?
