Design A will require 16 hours of lathe time and 4.5 hours of drill time per 1,0
ID: 1224537 • Letter: D
Question
Design A will require 16 hours of lathe time and 4.5 hours of drill time per 1,000 units. Design B will require 7 hours of lathe time and 12 hours of drill time per 1,000 units. The variable operating cost of the lathe, including labor, is $18.60 per hour. The variable operating cost of the drill, including labor, is $16.90 per hour. Finally, there is a sunk cost of $5,000 for Design A and $9,000 for Design B due to obsolete tooling. How much does it cost per unit to produce Design B?
a. $0.333/unit
b. $0.350/unit
c. $0.381/unit
d. $0.374/unit
Explanation / Answer
Lathe
Drill
Lathe cost
Drill cost
Total cost per 1000 unit
Design A
16
4.5
297.6
76.05
0.37365
Design B
7
12
130.2
202.8
0.333
Given the variable operating cost of the lathe, including labor, being $18.60 per hour, when Design A uses 16 hours of lathe time, a total cost of $297.6 is incurred. Using the drill for 4.5 hours will require a total of $76.05 to be spent. In all, a total of $0.373 per unit cost has to be paid in design A.
Similarly, when Design B uses 7 hours of lathe time, a total cost of $130.20 is incurred. Using the drill for 12 hours will require a total of $202.80 to be spent. In all, a total of $0.333 per unit cost has to be paid in design B.
Note that the sunk cost is not taken into consideration since it is an unavoidable cost and not a part of variable cost structure.
Hence correct option is A.
Lathe
Drill
Lathe cost
Drill cost
Total cost per 1000 unit
Design A
16
4.5
297.6
76.05
0.37365
Design B
7
12
130.2
202.8
0.333