Rom Generators is in the process of preparing a production cost budget for August.Actual costs in July for the production of 60 generators were: $\begin{array}{lr}
\text { Materials cost } & 5,200 \
\text { Labor cost } & 2,600 \
\text { Rent } & 1,200 \
\text { Depreciation } & 1,700 \
\text { Other fixed costs } & 4,600\
\text { Total }&\$15,300
\end{array}$ Materials and labor are the only variable costs.The company has estimated that it can increase sales to 70 generators in August if it changes the selling price of generators to $450 instead of the current $480 per unit.What is expected to occur to the cost per unit given the expected changes?
A)It will decline because fixed costs do not increase with increases in volume.
B)It will decline because selling price per unit declines.
C)It will increase because more units will be produced.
D)It will increase because fixed costs do not increase with increases in volume.

Question

Quizplus · Accepted Answer

Fixed costs (rent, depreciation, other fixed costs) remain constant regardless of the number of units produced, so as production volume increases, the fixed cost per unit decreases. Since materials and labor are variable costs, they will increase with the number of units produced, but the overall cost per unit is expected to decline due to the spreading of fixed costs over more units.

Rom Generators Is in the Process of Preparing a Production