Last Year Zimmer Co Sold 10,000 Units That Cost $40,000 To P

Last Year Zimmer Co Sold 10000 Units That Cost 40000 To Produce T

Last year Zimmer Co. sold 10,000 units that cost $40,000 to produce. This cost included $5,000 in fixed computer resource costs, $10,000 in fixed labor costs, and communication resource costs at $2.50 per unit. Resource (variable) costs are expected to be the same next year. Zimmer expects to sell 15,000 units. The sales manager predicts that next year’s cost will be $60,000.

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The cost-volume-profit (CVP) analysis provides a useful framework for understanding how costs behave relative to changes in production volume, and it is an essential tool for evaluating the sales manager’s prediction of costs for the upcoming year. By analyzing the components of Zimmer Co.’s costs and understanding their nature—fixed or variable—it is possible to assess the accuracy of the sales manager’s forecast and offer insights into cost behavior and profitability.

Understanding Fixed and Variable Costs

From the information provided, Zimmer’s total production cost last year was $40,000 for 10,000 units. This total includes fixed costs, such as $5,000 in computer resource costs and $10,000 in fixed labor costs, totaling $15,000. The remaining costs, attributed to communication resource costs at $2.50 per unit, are variable; for 10,000 units, this amounts to $25,000 ($2.50 × 10,000 units). This decomposition indicates that fixed costs comprise $15,000, and variable costs are $25,000 for last year’s production.

The fixed costs are unaffected by changes in volume within the relevant range of operation but are incurred regardless of the number of units produced or sold. Conversely, variable costs change proportionally with the volume, increasing or decreasing as units sold change.

Analyzing Cost Behavior and Next Year’s Forecast

Given that fixed costs are $15,000 and variable costs are $2.50 per unit, the total cost next year with a projected sales volume of 15,000 units can be estimated as:

Total Cost = Fixed Costs + (Variable Cost per Unit × Number of Units)

Total Cost = $15,000 + ($2.50 × 15,000) = $15,000 + $37,500 = $52,500

This prediction suggests an increase of $12,500 over last year’s costs ($40,000) primarily due to the higher volume, assuming costs behave linearly.

However, the sales manager predicts a total cost of $60,000, which exceeds the $52,500 estimate derived solely from current variable costs and fixed costs. This discrepancy indicates a possible expectation of higher fixed costs or additional variable costs not currently accounted for, or perhaps an anticipated increase in per-unit variable costs.

CVP Analysis and Cost Prediction Validity

CVP analysis hinges on the assumption that variable costs per unit remain constant within the relevant range, and fixed costs stay unchanged as volume varies. If these assumptions hold, the predicted costs are linear and predictable. The increase in total costs from $40,000 to $60,000 predicts a 50% rise, aligning with a 50% increase in sales volume, from 10,000 to 15,000 units—this suggests variable costs are expected to remain stable.

However, the cost prediction of $60,000 may incorporate anticipated changes in fixed or variable costs. For instance, if fixed costs increase due to additional resources or fixed expenses are projected to rise to support higher production levels, then the CVP analysis must account for these changes.

Furthermore, it is important to recognize that fixed costs are typically spread over more units, decreasing the per-unit fixed cost as volume increases. Nonetheless, if fixed costs are expected to rise with increased volume (e.g., capital investments, increased administrative costs), the total costs could surpass the linear estimate.

Implications for Decision Making

The sales manager’s prediction warrants scrutiny through CVP analysis by dissecting the components of the forecast. If the increase to $60,000 assumes higher fixed costs or higher per-unit variable costs, strategic decisions regarding pricing, production, and sales volume need to factor in these expected cost behaviors.

Additionally, the profit margin per unit can be assessed. If selling price per unit remains consistent, understanding whether the forecasted costs align with anticipated revenues will determine profitability.

In conclusion, from a CVP perspective, the sales manager’s cost prediction appears plausible if they expect fixed costs to increase or if variable costs will rise due to changes in resource prices or operational efficiencies. The linearity assumption seems valid within the typical operational range unless there are indications of cost behavior changes. Therefore, managers should verify these assumptions with detailed cost analysis and consider other factors such as economies of scale or possible cost reductions.

Recommendations

To improve accuracy in cost prediction, Zimmer Co. should regularly analyze its cost structure, distinguish between fixed and variable components, and monitor for changes as production volume varies. Employing detailed budgeting and variance analysis can help identify deviations from expected costs early, supporting more precise forecasting. Additionally, integrating CVP insights into strategic planning ensures better alignment between production plans and cost management.

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