Basil's Framing manufactures picture frames in a workshop with a practical capacity of 40,000 frames. The variable cost of producing a frame is $24 per unit, and the fixed costs of operating the workshop amount to $392,000 annually. Currently, the annual demand stands at 28,000 frames. Basil's Framing purchased this workshop based on forecasts predicting an increase in demand for frames.
Required:
a. What cost per frame should the cost system report to facilitate management decision-making?
b. What is the cost of excess capacity?
c1. What cost per frame would the cost system report if the smallest manufacturing plant that could be built was capable of producing 35,000 frames? What would be the cost of excess capacity? Note: Assume that capacity cost is proportional to volume.
c2. What cost per frame would the cost system report if the smallest manufacturing plant that could be built was capable of producing 35,000 frames? What would be the cost of excess capacity? Note: Assume that plant capacity is fixed.