sir the below question is from the kaplan texting your understanding
A manufacturing company is considering the production of a new type
of widget. Each widget will take two hours to make.
Fixed overheads are apportioned on the basis of $1 per labour hour.
If the new widgets are produced, the company will have to employ an
additional supervisor at a salary of $15,000 pa. The company will
produce 10,000 widgets pa.
What are the relevant cash flows?
for this question the answer is only the supervisor cost of $15000... and they stated that fixed ohs are not incremental
but what if they stated the company will produce additional 10000 units ?
will we multiply 10000 units x 2hrs x $1 per hour = $20000
so now will this $20000 along with the $15000 which gives a $35000 will be the total relevant cost sir ?
Ask the Tutor ACCA FM
basic investment appraisal techniques
Fixed costs remain fixed in total by definition. Therefore it is irrelevant how many additional units will be produced - there are no extra fixed costs (other than obviously the extra supervisor).
ok sir thank you
You are welcome.
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