XIAN Manufacturing produces a unique valve,and has the capacity to produce 50,000 valves annually.Currently XIAN produces 40,000 valves and is thinking about increasing production to 45,000 valves next year.What is the most likely behavior of total manufacturing costs and unit manufacturing costs given this change?
A) Total manufacturing costs will increase and unit manufacturing costs will stay the same.
B) Total manufacturing costs will increase and unit manufacturing costs will decrease.
C) Total manufacturing costs will stay the same and unit manufacturing costs will stay the same.
D) Total manufacturing costs will increase and unit manufacturing costs will also increase.

Question

Quizplus · Accepted Answer

If XIAN increases production from 40,000 to 45,000 valves, it will incur additional costs to produce these extra 5,000 valves. These extra costs might include additional labor, materials, and overhead expenses. Thus, total manufacturing costs are likely to increase. However, if XIAN is able to achieve economies of scale by producing more valves, it may be able to lower its unit manufacturing costs. This is because fixed costs, such as factory rent and management salaries, can be spread out over a greater number of valves. Therefore, choice B is the most likely outcome.

XIAN Manufacturing Produces a Unique Valve,and Has the Capacity to Produce