Reference no: EM132970095
Problem - Doorbell Candles manufactures candle holders and sells them in a competitive market at 58 each. There is a specialized machine for producing the holders. The production capacity of the machine is 5,400 candle holders per month. The machine costs $71,000 and is depreciated using straight-line depreciation over 5 years assuming zero residual value. When only one machine is used, rent for the factory space and warehouse is $1,200 per month.
In the current year, Doorbell makes and sells 3,000 candle holders per month. Doorbell buys materials at the beginning of each month to make the candle holders it needs to sell. Materials cost 20 cents per holder. Production workers are paid at a piece rate of $2 per holder.
Next year Doorbell expects demand to increase by 100%. At this volume of materials purchased, it will get a bulk purchase discount of 10%. Doorbell will buy an identical machine at the same cost (same depreciation policy) to meet the increase in demand. The landlord agrees that rent for the factory space and warehouse is still $1,200 per month as long as Doorbell pays an ad-valorem rent of 3% on overall output if a second machine is used on the factory premises.
Required -
a. Calculate and explain Doorbell's annual relevant range of output with respect to cost behaviors for the current year. State the amount of total variable costs and total fixed costs. Show your computations.
b. Calculate and explain Doorbell's annual relevant range of output with respect to cost behaviors for the next year. State the amount of total variable costs and total fixed costs.| Show your computations.
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