Chapter 10, Problem 43E

Assigning Cost of Capacity

Mimi’s Fixtures manufactures kitchen tiles in one plant, which has a practical capacity of 30,000 tiles. The variable cost of the tile is $18,00 per unit, and the fixed costs of the plant are $600,000 annually. Current annual demand is 25,000 tiles. Mimi bought the current plant because she expected that demand for the tiles would grow once her reputation was established.

Required

1. a.         What cost per tile should the cost system report?
2. b.         Given your answer to requirement (a), is there any cost of excess capacity? If yes, what is the cost of excess capacity and how should it be reported? If no, why not?
3. c.          How would your answers to requirements (a) and (b) change if the smallest tile manufacturing plant that one could build (owing to technology) was able to produce 30,000 tiles?