Quest Manufacturing Costs Per Unit Lab ✓ Solved
Quest Manufacturing Incurs The Following Costs Per Unit Labor 100
Identify and analyze the costs associated with Quest Manufacturing, including variable and fixed costs, based on the provided production data. Calculate total variable costs, total fixed costs, and total costs based on production levels.
Determine the marginal costs for each copier produced, given the varying production costs per unit, and analyze the optimal sales quantity assuming a selling price of $15 per copier.
Assess the break-even price for a plant producing 10,000 copiers annually, considering fixed and marginal costs. Evaluate how the break-even point changes if production increases by 70%.
Evaluate the profitability of an initial investment with a specified cash flow and discount rate, determining whether the investment is financially sound.
Examine short-term and long-term operational decisions for a U.S. company with given revenue and cost structures, analyzing whether the company should continue or cease operations under different scenarios.
Sample Paper For Above instruction
Introduction
Cost analysis and financial decision-making are crucial components of managerial accounting and strategic planning. Understanding how variable and fixed costs influence the total costs of production, as well as analyzing marginal costs and break-even points, enables firms to make informed decisions concerning production levels, pricing strategies, and investment opportunities. This paper systematically addresses multiple scenarios involving cost calculations, profit analysis, and investment evaluation, providing a comprehensive understanding of managerial decision-making processes.
Cost Analysis for Quest Manufacturing
Variable and Fixed Costs Calculation
Quest Manufacturing produces 500,000 units monthly, with costs per unit comprising labor at $100, materials at $50, and fixed rent at $100,000 per month. To identify total costs, it is essential to distinguish between variable and fixed costs.
Variable costs include labor and materials because these costs fluctuate directly with production levels. Fixed costs, such as rent, remain constant regardless of output volume.
Calculations:
- Total variable costs = (labor + materials) per unit × units produced = ($100 + $50) × 500,000 = $150 × 500,000 = $75,000,000
- Total fixed costs = rent = $100,000
- Total costs = total variable costs + total fixed costs = $75,000,000 + $100,000 = $75,100,000
Marginal Cost Analysis and Optimal Sales Quantity
Marginal Cost per Copier
The given costs for producing copiers are: $42, $44, $47, $50, $54, $60, $69, and $80. These can be interpreted as variable costs associated with producing each copier, incorporating marginal costs. The marginal cost is typically the additional cost incurred by producing one more unit.
Therefore, the marginal costs for each copier are: $42, $44, $47, $50, $54, $60, $69, and $80, corresponding directly to the incremental cost for each additional copier.
Decision on Sales Volume
If the selling price per copier is $15, which is significantly below the marginal costs, the firm would incur losses for each unit sold, making sales unprofitable. Ideally, the firm should only sell copiers when the selling price exceeds the marginal cost, which here is not the case for any of the provided costs. Hence, to determine profitable sales, the firm should aim for a selling price higher than the lowest marginal cost, preferably above the highest marginal cost to ensure profitability.
In this scenario, with a selling price of $15 per copier versus marginal costs starting at $42, selling copiers would result in a net loss, and the firm would not want to sell any units unless prices increase to cover costs.
Break-Even Analysis for Copier Production
Constant Marginal Cost and Fixed Cost
Suppose a plant produces 10,000 copiers annually with fixed costs of $50,000 and a constant marginal cost of $5 per copier. The break-even price is the minimum price at which total revenue equals total costs.
Break-even price (P) is calculated as: P = (Total Fixed Costs + Total Variable Costs) / Quantity
Thus,
P = ($50,000 + ($5 × 10,000)) / 10,000 = ($50,000 + $50,000) / 10,000 = $100,000 / 10,000 = $10
Therefore, the break-even price per copier is $10.
Impact of Increased Production
If production increases by 70%, total units become 17,000. The fixed costs remain the same, but the total variable costs increase to $5 × 17,000 = $85,000.
New break-even price: (Fixed Costs + Variable Costs) / Quantity = ($50,000 + $85,000)/17,000 ≈ $8.53
Thus, increasing production reduces the break-even price, enhancing profit margins if selling prices remain at or above this level.
Investment Evaluation: Discounted Cash Flow Analysis
Initial Investment and Cash Flows
The initial investment of $70,000 generates annual cash flows of $20,000 for four years. To determine profitability, discounted cash flow (DCF) analysis is performed using a discount rate of 15%.
Net Present Value (NPV) is calculated as:
- NPV = ∑ (Cash flows / (1 + r)^t) - Initial investment
Where r = 15%, t = year, and cash flows are $20,000 annually.
NPV calculation:
- Year 1: $20,000 / (1 + 0.15)^1 ≈ $17,391
- Year 2: $20,000 / (1 + 0.15)^2 ≈ $15,124
- Year 3: $20,000 / (1 + 0.15)^3 ≈ $13,152
- Year 4: $20,000 / (1 + 0.15)^4 ≈ $11,444
Total present value of cash flows ≈ $57,111
NPV ≈ $57,111 - $70,000 = - $12,889
Since the NPV is negative, this investment would not be considered profitable based on the 15% discount rate.
Short-term and Long-term Operational Decisions
Scenario 1: Revenue of $5.5 million and costs of $7.5 million, with a net loss of $2 million
The firm is experiencing losses and should assess whether to continue operations. In the short term, continuing operations might be justified if fixed costs are unavoidable and the company can cover variable costs, minimizing further losses. However, in the long term, ongoing losses suggest fundamental issues, such as pricing, demand, or cost structure, and discontinuing or restructuring operations could be advisable.
Scenario 2: Revenue of $5 million and costs of $7.5 million, with a net loss of $1.2 million
Given the consistent trend of losses, the firm should consider strategic options such as cost reduction, increasing revenues, or winding down operations. Continuing operations solely to cover fixed costs might not be sustainable if losses persist, and strategic restructuring or exiting the market could be preferable to preserve long-term value.
Conclusion
This comprehensive analysis underscores the importance of detailed cost evaluation, pricing strategies, investment appraisal, and operational decision-making. Firms must critically assess their cost structures and market conditions to optimize profitability and sustainability in dynamic business environments.
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