Exercise 5-2 Shingle Enterprises is considering manufacturing a new product. It

Question

Exercise 5-2 Shingle Enterprises is considering manufacturing a new product. It projects the cost of direct materials and rent for a range of output as shown below Output Rent Direct in Units Expense Materials 1,000 $5,730 4,584 5,730 9,168 9,168 9,168 9,168 9,168 9,168 11,460 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 11,460 11,000 8,251 7,800 10,400 13,000 15,600 18,200 20,800 33,578 40,110 50,424 11,460 [ Your answer is correct. Determine the relevant range of activity for this product The relevant range of activity for this product 3,000- 8,000 units

Explanation / Answer

The relevant range for the product is 3000-8000 units, so we need to determine the variable cost per unit within this range. You can observe that for every increase in 1000 units,additional direct material cost increase by 2600. When output increased from 3000 to 4000 units , material cost increased by 2600 (10400-7800). Similarily, when output increased from 7000 to 8000 units, material cost incurred by 2600(20800-18200)

So the variable cost per unit = 2600/1000= $2.6 per unit

  

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