Question

Rundle Company makes fine jewelry that it sells to department stores throughout the United States. Rundle is trying to decide which of the two bracelets to manufacture. Cost data pertaining to the two choices follow: Bracelet A Bracelet B Cost of materials per unit $ 41 $ 48 Cost of labor per unit 49 49 Advertising cost per year 9,500 6,200 Annual depreciation on existing equipment 6,000 5,600 Required Identify the fixed costs and determine the amount of fixed cost for each product. Identify the variable costs and determine the amount of variable cost per unit for each product. Identify the avoidable costs and determine the amount of avoidable cost for each product.

Answer 1

Answer:

a) The fixed costs pertain to Advertising and Depreciation.

For product A, the fixed costs are $9,500 + $6,000 = $15,500.

For product B, the fixed costs are $6,200 + $5,600 = $11,800.

b) The variable costs are related to costs of materials and labour.

For product A, the Variable costs per unit = $41 + $49 = $90.

For product B, the Variable costs per unit = $48 + $49 = $97.

c) The avoidable costs relate to Advertising.

For product A, the avoidable cost = $9,500.

For product B, the avoidable cost = $6,200.

Explanation:

Fixed costs are costs which do not vary with the quantity or units of production.  Whether there is production or not, most fixed costs must be incurred, provided the company is in business.  Examples include Rent, Depreciation, Salaries of Administration staff, etc.  Their total costs are fixed while their per unit costs vary.

Variable costs are costs which vary with production units.  Such costs are incurred when actual production take place.  Unit costs do not vary but the total costs vary depending on the quantity produced.  Examples include costs of materials and direct labour.

Avoidable costs are discretionary costs which management can decide to do without.  While most avoidable costs are necessary for business, they are not indispensable.  A good example of avoidable cost is Advertising.