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Question: Galena Corporation produces automobile tires. They have a single factory and own the machinery and equipment used to produce the tires. The total capacity cost is $100,000 per year.
Galena's managers estimate that the factory, if run 24 hours per day, every day, could produce 100,000 tires per year. However, given the machinery and equipment need regular maintenance, and employees require holidays, vacation time, and sick time, a more realistic estimate is 80,000 tires per year. Over the past five years, the average demand is 50,000 tires per year. This year, managers anticipate demand of 75,000 tires.
What is the capacity cost per tire if managers use theoretical capacity as the basis?
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