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basic investment appraisal techniques

BBrian4y ago
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 ?
John MoffatJohn MoffatTutor4y ago#1
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).
BBrian4y ago#2
ok sir thank you
John MoffatJohn MoffatTutor4y ago#3
You are welcome.
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