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why we consider demand in calculating cost not capacity?
if demand=capacity the sales units= production units Then cost calculation will be based on the same unit
In the case of capacity or production units are less than sales demand, do we always consider sales units (demand) in calculating cost?
In this example, I took 120 demand for sales and 150 for production cost?
Then I checked my answer,they had taken sales units in calculatin total cost.
It reminds me transfer price system.despite the capacity,how much the divison sells to external customer and internal division,always sales units in total are taken into account in calculating cost.The question makes it clear that the cost changes depending on the demand. If the demand is less than the capacity then the variable cost is lower, but if the demand is more than the capacity then there is lost goodwill.
This is not always the case, but it is the case here because the question specifically says it is.
Dear tutor, Understood it.If variable cost decrease its because of capacity decreases.
I was about to open a new thread to ask “Stow Health centre” but I saw your explanation in the past forum,then I reconciled “shifter haulage”example with “stow health centre” example.Because of your explanation, I also understood “stow health centre” example.
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