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A company rents its factory for $90,000 per annum. This year 60,000 units have been manufactured in the factory utilising 75% of its total capacity. Next year the plan is to manufacture 100,000 units by using the existing factory at full capacity and by renting just sufficient additional capacity. The additional capacity is available at the same rental cost per square metre as the existing factory.
What is the budgeted total rental cost for next year?
Sir I have confusion in this question my answer is 227,500 because as it says it uses 75% capacity in first year and in 2nd 100% capacity, so i assumed for 60,000 units, cost would be 45,000 and 100k units would be 100k cost because it’s done at full cap, after calculating variable cost per unit i multiplied it with 100k units and added with factory rent in order to find total budgeted cost, please could you explain me this question
Answer is 112500
If 60,000 units is 75% capacity, then the total capacity at the moment is 60,000/75% = 80,000.
Therefore they can produce 80,000 while paying the same rent of $90,000 (which is 90,000/80,000 = $1.125 per unit.
They will be producing 100,000 units which is 20,000 more than the 80,000 they are currently able to produce. The extra units mean paying for extra space which costs the same price per unit and therefore will cost them an extra 20,000 x 1.125 = $22,500.
Therefore the total cost will be 90,000 + 22,500 = $112,500.
(I do not know which book you are using, but it is dreadful of them not to have explained their answer.)
No sir this is not from book, it’s from 2nd hubmock i attempted today and they did explain but u explain it in a much easier way that’s why i preferred asking from you
Thankyou sir i got it!
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