Answer:
Fast Photo
Memo to Matt:
From: Financial Controller
To: Matt Paige (Asst Controller)
Subject: Fixed Overhead and Plant D's Profit
Date: June 5, 2020
The above subject refers.
I wish to clarify the issue of fixed cost per unit. It is true that fixed cost per unit decreases with increased volume. It is also true that Plant D had much lower average fixed costs per roll $4.62 ($300,000/65,000) than Plants A's $6 ($300,000/50,000), B's $5.45 ($300,000/55,000) and even C's $5 ($300,000/60,000).
However, the issue of profit is not dependent on the fixed cost per unit alone. There are other variables. Profit is also determined by the variable cost per unit and the selling price. Since the four plants have the same selling price, we shall not consider selling price as a factor hence.
Therefore, note the variable cost per unit for each plant stated as follows: A = $3.90, B = $4.40, C= $4.97, and D = $5.42. This shows that it costs more per unit of variable cost to produce in Plant D. The difference will be explained by efficiencies in technology use, processing, quantity of materials used and wasted, and the number of labor hours spent in Plant D vis-a-vis other plants.
It is then necessary to review these variances as stated in order to explain why Plant D recorded a net loss of $2,000.
I hope that this issue has been clarified.
Regards,
FC
Explanation:
a) Operating Results for November:
Plant A Plant B Plant C Plant D
Number of rolls processed 50,000 55,000 60,000 65,000
Revenue ($000s) $500 $550 $600 $650
Less:
Variable costs (195) (242) (298) (352)
Fixed costs (300) (300) (300) (300)
Profit (loss) $ 5 $ 8 $ 2 $ (2)
b) Profit is not determined by fixed costs only. It is also influenced by the variable costs and selling price.
