Chapter 2, Problem 2.28E

Variable costs, fixed costs, relevant range. Gummy Land Candies manufactures jaw-breaker candies in a fully automated process. The machine that produces candies was purchased recently and can make 5,000 per month. The machine costs $6,500 and is depreciated using straight-line depreciation over 10 years assuming zero residual value. Rent for the factory space and warehouse and other fixed manufacturing overhead costs total $1,200 per month.

Gummy Land currently makes and sells 3,900 jaw-breakers per month. Gummy Land buys just enough materials each month to make the jaw-breakers it needs to sell. Materials cost 40¢ per jaw-breaker.

Next year Gummy Land expects demand to increase by 100%. At this volume of materials purchased, it will get a 10% discount on price. Rent and other fixed manufacturing overhead costs will remain the same.

1. 1. What is Gummy Land’s current annual relevant range of output?

Required

1. 2. What is Gummy Land’s current annual fixed manufacturing cost within the relevant range? What is the annual variable manufacturing cost?
2. 3. What will Gummy Land’s relevant range of output be next year? How, if at all, will total annual fixed and variable manufacturing costs change next year? Assume that if it needs to Gummy Land could buy an identical machine at the same cost as the one it already has.