Exercise 14-25 STEP COSTS, RELEVANT RANGE

Bellati Inc. produces large industrial machinery. Bellati has a machining department and a group of direct laborers called machinists. Each machinist is paid $50,000 and can machine up to 500 units per year. Bellati also hires supervisors to develop machine speci- fication plans and to oversee production within the machining department. Given the planning and supervisory work, a supervisor can oversee, at most, three machinists. Bel- lati’s accounting and production history shows the following relationships between number of units produced and the costs of materials handling and supervision (measured on an annual basis):

 

 

 

 

 

 

 

 

 

 

 

Â	Units Produced	Direct Labor ($)	Supervision ($)
	0–500	36,000	40,000
	501–1,000	72,000	40,000
	1,001–1,500	108,000	40,000
	1,501–2,000	144,000	80,000
	2,001–2,500	180,000	80,000
	2,501–3,000	216,000	80,000
	3,001–3,500	252,000	120,000
	3,501–4,000	288,000	120,000
Required:	Â	Â	Â

 

1.       Prepare a graph that illustrates the relationship between direct labor cost and num- ber of units produced in the machining department. (Let cost be the vertical axis and number of units produced the horizontal axis.) Would you classify this cost as a strictly variable cost, a fixed cost, or a step cost?

2.       Prepare a graph that illustrates the relationship between the cost of supervision and the number of units produced. (Let cost be the vertical axis and number of units produced the horizontal axis.) Would you classify this cost as a strictly variable cost, a fixed cost, or a step cost?

3.       Suppose that the normal range of activity is between 1,400 and 1,500 units and that the exact number of machinists are currently hired to support this level of activity. Fur- ther suppose that production for the next year is expected to increase by an additional 500 units. By how much will the cost of direct labor increase? Cost of supervision?