Chapter 3, Problem 38E

1.

To determine

Calculate the amount of total maintenance cost which is incurred by Company A.

Answer to Problem 38E

The value of total maintenance cost is $4,875,000.

Explanation of Solution

Cost:

Cost can be defined as the cash and cash equivalent which is incurred against the products or its related services which will benefit the organization in the future. There are two types of costs that are fixed and variable costs.

Use the following formula to calculate the value of total maintenance cost which is incurred by Company AL:

$\text{Total Maintenance Cost}=\text{Fixed Cost}+\left(\text{Variable Rate}\times \text{Number Of Heart Stents}\right)$

Substitute $1,750,000 for fixed cost, $125 for variable rate and 25,000 for number of heart stents in the above formula.

$\begin{array}{c}\text{Total Maintenance Cost}=\$1,750,000+\left(\$125\times 25,000\right)\\ =\$1,750,000+\$3,125,000\\ =\$4,875,000\end{array}$

Therefore, the value of total maintenance cost is $4,875,000.

2.

To determine

Calculate the amount of total fixed maintenance cost which is incurred by Company A.

Answer to Problem 38E

The value of total fixed maintenance cost is $1,750,000.

Explanation of Solution

Fixed cost is the cost which is not affected by the change in level of output. It remains unchanged in the short run, for example, property taxes, rent and salaries. The value of total fixed maintenance cost is given in the problem that is $1,750,000.

3.

To determine

Calculate the amount of total variable maintenance cost which is incurred by Company A.

Answer to Problem 38E

The value of total variable maintenance cost is $3,125,000.

Explanation of Solution

Use the following formula to calculate the value of total variable maintenance cost which is incurred by Company AL:

$\text{Total Variable Maintenance Cost}=\text{Variable Rate}\times \text{Number Of Heart Stents}$

Substitute $125 for variable rate and 25,000 for number of heart stents in the above formula.

$\begin{array}{c}\text{Total Variable Maintenance Cost}=\$125\times 25,000\\ =\$3,125,000\end{array}$

Therefore, the value of total variable maintenance cost is $3,125,000.

4.

To determine

Calculate the value of maintenance cost per unit produced.

Answer to Problem 38E

The value of maintenance cost per unit produced is $195.

Explanation of Solution

Use the following formula to calculate the value of maintenance cost per unit produced:

$\text{Total Maintenance Cost Per Unit}=\frac{\text{Fixed Cost}+\left(\text{Variable Rate}\times \text{Number Of Heart Stents}\right)}{\text{Number Of Heart Stents}}$

Substitute $1,750,000 for fixed cost, $125 for variable rate and 25,000 for number of heart stents in the above formula.

$\begin{array}{c}\text{Total Maintenance Cost Per Unit}=\frac{\$1,750,000+\left(\$125\times 25,00\text{0 Stents}\right)}{25,00\text{0 Stents}}\\ =\frac{\$4,875,000}{25,00\text{0 Stents}}\\ =\$195\end{array}$

Therefore, the value of maintenance cost per unit produced is $195.

5.

To determine

Calculate the value of fixed maintenance cost per unit produced.

Answer to Problem 38E

The value of fixed maintenance cost per unit produced is $70.

Explanation of Solution

Use the following formula to calculate the value of maintenance cost per unit produced:

$\text{Total Fixed Maintenance Cost Per Unit}=\frac{\text{Fixed Cost}}{\text{Number Of Heart Stents}}$

Substitute $1,750,000 for fixed cost and 25,000 for number of heart stents in the above formula.

$\begin{array}{c}\text{Total Fixed Maintenance Cost Per Unit}=\frac{\$1,750,000}{\text{25,000 Stents}}\\ =\$70\end{array}$

Therefore, the value of fixed maintenance cost per unit produced is $70.

6.

To determine

Calculate the value of variable maintenance cost per unit produced.

Answer to Problem 38E

The value of variable maintenance cost per unit produced is $125.

Explanation of Solution

Variable cost is the cost which changes with the change in the level of output. In other words, variable cost increases with the increase in units produced and decreases with the decrease in units produced. The value of variable maintenance cost per unit produced is given in the problem that is $125.

7.

To determine

Discuss the factors due to which maintenance cost per unit is higher in this problem as compared to exercise 3-37. Also, identify whether the Company A should use the maintenance cost per unit to make decisions.

Explanation of Solution

The maintenance cost in this problem and in exercise 3-37 is $195 and $160 respectively. The maintenance cost is higher in this problem because Company A incurs fixed cost in order to manufacture the number of heart stents. The fixed cost of Company A does not change with the change in the number of heart stents that is 25,000 stents to 50,000 stents. On the contrary, as the volume of output decreases, the maintenance cost per unit increases and vice-versa.

Yes, Company A should use the maintenance cost per unit in making certain decisions. Company should also consider that unit cost computed at one output level cannot determine the total cost at different output levels.