Variable cost per unit is same regardless of volume

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Reference no: EM131725035

1. The manager of a tire manufacturing company has to decide whether to expand the plant and increase it capacity to be able to meet the excess annual (yearly) demand of 2000 tires. The expansion will result in an expansion cost of $100,000 per year. The variable cost per unit is $60 while each tire is sold for $200. NOTE: ASSUME that the company currently has a net positive profit from the sales of their tires.

a. The manager should expand the plant to meet the excess demand since the BEP for this expansion is greater than the excess demand.

b. The manager should not expand the plant to meet the excess demand since the BEP for this expansion is greater than the excess demand.

c. The manager should expand the plant to meet the excess demand since the BEP for this expansion is less than the excess demand.

d. Enough information is not given. We need to know the total demand for tires as well not just the excess demand.

2. When using the cost-volume analysis approach for making capacity planning decisions, we assume that the variable cost per unit is the same regardless of the volume.

True

False

why?

Reference no: EM131725035

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