Question

Your plant produces 100 snowmobiles per month. Direct costs are $2,000 per snowmobile. Monthly overhead is $90,000. What is the average cost per snowmobile with overhead?

Answer 1

Answer:

$2,900

Explanation:

If we use a cost function, it will be easy to understand. Cost function = (variable cost per unit × quantity) + fixed cost.

Here,

Direct cost per snowmobile = $2,000. It is the variable cost.

Overhead cost = $90,000. It is a fixed cost.

Total snowmobiles = 100 units

Total cost = ($2,000 × 100 snowmobiles) + $90,000

Total cost = $290,000

We know,

Average cost per snowmobile = Total cost ÷ total quantity

Average cost per snowmobile = $290,000 ÷ 100

Average cost per snowmobile = $2,900