MC Question 22
The following scenario relates to questions 21–25.
Corfe Co is a business which manufactures computer laptop batteries and it has developed a new battery which has a longer usage time than batteries currently available in laptops. The selling price of the battery is forecast to be $45.
The maximum production capacity of Corfe Co is 262,500 units. The company’s management accountant is currently preparing an annual flexible budget and has collected the following information so far:
| Production (units) | 185,000 | 200,000 | 225,000 |
|---|---|---|---|
| $ | $ | $ | |
| Material costs | 740,000 | 800,000 | 900,000 |
| Labour costs | 1,017,500 | 1,100,000 | 1,237,500 |
| Fixed costs | 750,000 | 750,000 | 750,000 |
In addition to the above costs, the management accountant estimates that for each increment of 50,000 units produced, one supervisor will need to be employed. A supervisor’s annual salary is $35,000.
The production manager does not understand why the flexible budgets have been produced as he has always used a fixed budget previously.
The management accountant has said that a machine maintenance cost was not included in the flexible budget but needs to be taken into account.
The new battery will be manufactured on a machine currently owned by Corfe Co which was previously used for a product which has now been discontinued. The management accountant estimates that every 1,000 units will take 14 hours to produce. The annual machine hours and maintenance costs for the machine for the last four years have been as follows:
| Machine time | Maintenance costs | |
|---|---|---|
| (hours) | ($’000) | |
| Year 1 | 5,000 | 850 |
| Year 2 | 4,400 | 735 |
| Year 3 | 4,850 | 815 |
| Year 4 | 1,800 | 450 |
22. What is the estimated maintenance cost if production of the battery is 80% of maximum capacity (to the nearest $’000)?
A $575,000
B $593,000
C $500,000
D $735,000