Magnificent Modems has excess production capacity and is considering the possibility of making and selling paging equipment. The following estimates are based on a production and sales volume of 1,000 pagers.
Unit-level manufacturing costs are expected to be $20. Sales commissions will be established at $1 per unit. The current facility-level costs, including depreciation on manufacturing equipment ($60,000), rent on the manufacturing facility ($50,000), depreciation on the administrative equipment ($12,000), and other fixed administrative expenses ($71,950), will not be affected by the production of the pagers. The chief accountant has decided to allocate the facility-level costs to the existing product (modems) and to the new product (pagers) on the basis of the number of units of product made (i.e., 5,000 modems and 1,000 pagers).
Required
a. Determine the per-unit cost of making and selling 1,000 pagers.
b. Assuming the pagers could be sold at a price of $34 each, should Magnificent make the pagers?
c. Comment on the validity of using the number of units as an allocation base.