Problemtrue Flight Golf Shaft Manufacturers: A Popular Choic
Problemtrue Flight Golf Manufacturers A Popular Shaft For Golf Cl
A manufacturing company produces a popular golf shaft with a proprietary weaving process for high-tension wire, which improves energy transfer during swings. The company employs a specialized machine costing $3,000,000, with a useful life of three years and no salvage value, depreciated using straight-line method. During the year, 25,000 shafts are produced, utilizing $700,000 worth of wire. The question requires analysis of fixed and variable costs, cost per unit under different production levels, and implications for future scaling and machine costs.
Sample Paper For Above instruction
Introduction
Understanding the nature of manufacturing costs is crucial for effective managerial decision-making. In the case of True Flight, a prominent manufacturer of golf shafts, classifying costs into fixed and variable components provides insights into cost behavior, pricing, and scalability. This paper examines the fixed or variable nature of machinery depreciation and wire costs, calculates total and per-unit costs at different production levels, explores the impact of scaling production, and discusses how machine costs are characterized as production expands.
Analysis of Machinery Depreciation and Wire Costs
The depreciation expense for the specialized machine is a fixed cost, as it remains unchanged regardless of the number of units produced within the applicable period. Since the machine has a three-year life and no salvage value, annual straight-line depreciation is calculated as:
\[
\text{Annual Depreciation} = \frac{\text{Cost of Machine}}{\text{Useful Life}} = \frac{3,000,000}{3} = 1,000,000
\]
This expense is fixed because it does not fluctuate with production volume. It remains constant regardless of whether 20,000 or 25,000 shafts are produced. Conversely, wire costs are variable, directly proportional to production quantity, as they depend on the amount of wire used during manufacturing. The total wire cost of $700,000 for 25,000 shafts indicates a per-unit wire cost:
\[
\frac{700,000}{25,000} = 28 \text{ per shaft}
\]
Therefore, wire expenses vary with the number of units produced.
Cost Calculation at 25,000 Units
Total fixed costs: depreciation of $1,000,000
Total variable costs: wire at $700,000
Total costs: $1,700,000
Per-unit fixed cost:
\[
\frac{1,000,000}{25,000} = 40 \text{ per shaft}
\]
Per-unit variable cost:
\[
\frac{700,000}{25,000} = 28 \text{ per shaft}
\]
Total per-unit cost:
\[
40 + 28 = 68 \text{ per shaft}
\]
At full capacity, fixed costs are spread over 25,000 units, resulting in a fixed cost per unit of $40.
Cost Analysis at Reduced Production of 20,000 Units
Assuming proportional reduction in wire usage with decreased production, wire costs would be:
\[
\frac{700,000}{25,000} \times 20,000 = 560,000
\]
Total fixed depreciation remains at $1,000,000. Thus, total costs:
\[
1,000,000 + 560,000 = 1,560,000
\]
Per-unit fixed cost:
\[
\frac{1,000,000}{20,000} = 50
\]
Per-unit variable cost:
\[
\frac{560,000}{20,000} = 28
\]
Total per-unit cost:
\[
50 + 28 = 78 \text{ per shaft}
\]
This indicates that reducing production increases the fixed cost per unit due to a smaller production base.
Implications for Future Production and Cost Behavior
If the company plans to expand to 40,000 units, the fixed cost remains unchanged at $1,000,000, but the average fixed cost per unit drops:
\[
\frac{1,000,000}{40,000} = 25
\]
Assuming wire costs increase proportionally based on higher production:
\[
\frac{700,000}{25,000} \times 40,000 = 1,120,000
\]
Total costs:
\[
1,000,000 + 1,120,000 = 2,120,000
\]
Per-unit costs are then:
\[
\frac{1,000,000}{40,000} = 25 \text{ (fixed)}; \quad \frac{1,120,000}{40,000} = 28 \text{ (variable)}
\]
Total per-unit cost:
\[
25 + 28 = 53
\]
This demonstrates that expanding production reduces fixed costs per unit and maintains linear variable costs, emphasizing economies of scale.
Characterization of Machine Costs in Growing Operations
As enterprise growth necessitates additional machines, the cost of each new machine is best characterized as a fixed cost. Each machine incurs an initial purchase expense, depreciation, and maintenance, which are independent of the number of units produced once operational. However, the aggregate fixed costs escalate as more machines are added, but per-machine fixed costs remain constant. These costs are spread over larger production volumes, leading to lower fixed cost per unit, fostering economies of scale.
Cost Minimization and Production Level Analysis
The per-unit total cost is minimized at a production level where fixed costs are spread across the maximum number of units feasible. Ideally, this occurs at or near full capacity, where the fixed costs per unit approach their lowest point. Production beyond full capacity generally involves additional capital investments, additional fixed costs, and potential inefficiencies, while producing fewer units increases fixed costs per unit due to under-utilization.
Conclusion
Classifying costs accurately is essential for strategic pricing, budgeting, and scalability analysis. Fixed costs such as machinery depreciation are unaffected by production volume in the short term, while variable costs like wire are directly proportional. Efficient scaling, through increased production, leverages economies of scale by spreading fixed costs over a larger output and maintaining stable variable costs. Understanding these cost behaviors allows managers to optimize production levels, prepare for growth, and make informed capital investment decisions.
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