Question

Curt’s Casting manufactures metal parts in a large manufacturing facility. Curt’s customers order 62,000 tons of castings each quarter. The facility has a practical capacity of 104,000 tons. Curt leased the current facility because it was more convenient than another new facility that had a capacity of 62,000 tons. The annual cost of the facility is $520,000. The variable cost of a casting is $6.



Required:

a. What cost per casting should the cost system report?

b. Given your answer to requirement (a), what is the cost of excess capacity?

Answer 1

The cost per casting that the cost system should report is $11 and the cost of excess capacity is $210,000.

Cost per casting

Cost per casting = Variable + Fixed

Cost per casting= $6+ ($520,000/104,000 tons)

Cost per casting=$6+$5

Cost per casting=$11

Cost of excess capacity:

Cost of excess capacity=$520,000- [($520,000/104,000 tons)×62,000 ton

Cost of excess capacity=$520,000-($5×62,000 tons)

Cost of excess capacity=$520,000-$310,000

Cost of excess capacity=$210,000

Therefore the cost per casting that the cost system should report is $11  and the cost of excess capacity is $210,000.

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