Short-Term Decision-Making

Alta Production, Inc., is using the account analysis approach to identify the behavior of production costs for a month in which it produced 350 units. The production manager was asked to review these costs and provide her best guess as to how they should be categorized. She responded with the following information:

1. Describe the production costs in the equation form $Y = f + vX$.
2. Assume Alta intends to produce 400 units next month. Calculate total production costs for the month.

Solution to Review Problem 5.2

1. Because $f$ represents total fixed costs, and $v$ represents variable cost per unit, the cost equation is: $Y$ = $7,000 + $1,428.57X. (Variable cost per unit of $1,428.57 = $500,000 ÷ 350 units.)
2. Using the previous equation, simply substitute 400 units for $X$, as follows:
   $Y$ = $7,000 + $1428.57 x 400 units)
   $Y$ = $7,000 + $571,428
   $Y$ = $578,428
   

Thus total production costs are expected to be $578,428 for next month.