Reference no: EM132606388

Question - A corporation is considering the addition of new automated manufacturing equipment in one of its production departments. Currently, the department produces 50,000 units a year with average unit costs as follows:

Direct materials $50

Direct labor (2 hours at $15 per hour) 30

Fixed overhead 20

Both direct materials and direct labor are variable costs. The ratio of unit fixed costs to unit variable costs (direct materials plus direct labor) in the current labor-intensive operation is 25% ($20 ÷ $80). The new machinery will increase total fixed overhead costs in the department by $500,000 per year and make production more capital-intensive. Production will double to 100,000 units a year using the same total number of direct labor hours per year as the old labor intensive operation. Direct materials cost will be unchanged at $50 per unit. Which of the following is the predicted ratio of unit fixed costs to unit variable costs in the new capital intensive operation?

A. 18.75%

B. 23.08%

C. 30.77%

D. 15.38%