Tire and Spoke Manufacturing currently produces 1,000 bicycles per month. The following per unit data apply for sales to regular customers: The plant has capacity for 3,000 bicycles and is considering expanding production to 2,000 bicycles. What is the per unit cost of producing 2,000 bicycles?
A)$79 per unit
B)$158 per unit
C)$74 per unit
D)$134 per unit

Question

Tire and Spoke Manufacturing currently produces 1,000 bicycles per month. The following per unit data apply for sales to regular customers:  The plant has capacity for 3,000 bicycles and is considering expanding production to 2,000 bicycles. What is the per unit cost of producing 2,000 bicycles?
A)$79 per unit 
B)$158 per unit 
C)$74 per unit 
D)$134 per unit

Quizplus · Accepted Answer

First, we need to calculate the fixed cost and variable cost per unit.

Fixed cost per unit = Total fixed cost / Number of units produced 
= $180,000 / 1000 
= $180

Variable cost per unit = Total variable cost / Number of units produced 
= $420,000 / 1000 
= $420

Total cost per unit = Fixed cost per unit + Variable cost per unit 
= $180 + $420 
= $600

If production is expanded to 2,000 bicycles, the total cost will be:

Total cost = (Fixed cost + Variable cost per unit) x Number of units produced 
= ($180,000 + ($420 x 2000)) 
= $1,080,000

Per unit cost for 2,000 bicycles = Total cost / Number of units produced 
= $1,080,000 / 2,000 
= $540

Therefore, the per unit cost of producing 2,000 bicycles is $540, which is higher than the per unit cost for producing 1,000 bicycles ($600).

To choose the best answer, we need to find the closest choice to $540. The closest is $74 per unit, which is answer choice C. Therefore, the correct answer is C).

Tire and Spoke Manufacturing Currently Produces 1,000 Bicycles Per Month