A firm's average cost increases as it increases its output by expanding its plant and hiring additional workers (its only inputs
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Solution :
a). The assigned total cost is :
Total overheads $ 500,000
Total hours 250,000
Plantwide overhead rate $ 2
Cost assigned to :
A ( 2 x 4 x 1000) $ 8,000
B ( 2 x 4 x 3000) $ 24,000
b). Department 1 Department 2
Overheads $ 300,000 $ 200,000
Hours 200,000 50,000
Overhead rate $ 1.50 $ 4.00
Overheads for the product A $ 8,500
(1.5 x 3 + 4 x 1) x 1000
Overheads for the product B $ 40,500
(1.5 x 3 + 4 x 1) x 3000
c). Plant wide Departmental
material and labor $ 10 $ 10
overheads $ 8 $ 13.50
Total $ 18.00 $ 23.50
Add: profit $ 7.20 $ 9.40
Selling price $ 25.20 $ 32.90
The difference $ 7.70
Therefore, the increase in the selling price = $ 7.70