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when a business makes an additional unit of a pdt ,it incurs an extra cost of
$5 for direct materials
$7for direct labour
$3 for variable overheads
and fixed overheads of $2 based on expected production of 10000 units. what is the cost equation?
If the bsns buys enough materials for 5000 units it will only have to pay $4/unit. What is the cost function for production of more than 5000 units?As per Bpp the answer is
Tc= 20000+15q
where the variable cost/unit =5+7+3=15 and fixed overhead is 2*10000=20000.
and the answer for second question is
Tc=20000+14q where variable cost/unit =4+7+3=14.
My doubt is if the question is to find the cost function for pdtn of more than 5000 units how the variable cost /unit =14?
because in the question it is said that upto a pdtn of 5000 units direct materials cost only $4/unit if the pdtn increases the how come the direct materials cost remain same $4/unit?It is because the implication is that if it buys for less that 5000 unit the materials cos is $5 a unit, but if it is 5000 or more then it will be $4 a unit.
So total variable cost is materials $4 + labour $7 + overheads $3 = $14.Think about it – it would be mad for them to only charge $4 is you bought material for exactly 5000 units. The only reason for them reducing the price is because you are buying a large quantity and so $4 must be for 5,000 units or more.
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