Chapter 21, Problem 21.5CP

Variable costs and activity bases in decision making

The owner of Warwick Printing, a printing company, is planning direct labor needs for the upcoming year. The owner has provided you with the following information for next year's plans:

	One Color	Two Color	Three Color	Four Color	Total
Number of banners	212	274	616	698	1,800

Each color on the banner must be printed one at a time. Thus, for example, a four color banner will need to be run through the printing operation four separate times. The total production volume last year was 800 banners, as follows:

	One Color	Two Color	Three Color	Total
Number of banners	180	240	380	800

As you can see, the four-color banner is a new product offering for the upcoming year. The owner believes that the expected 1,000-unit increase in volume from last year means that direct labor expenses should increase by 125% (1,000 ÷ 800). What do you think?