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Q. 2.9

Jackson Company makes microwave ovens. One activity in assembling the microwave oven is to test it before it leaves the manufacturing plant. It estimates that the annual fixed costs to purchase testing equipment, use space in the plant, and train employees are \$100,000. The variable costs of labor and electricity to do the testing are \$10 per unit. What are total expected costs if the company tests 5,000 microwave ovens per year? What are total expected costs if the company tests 7,000 microwave ovens per year?

Verified Solution

Total expected costs to test 5,000 microwave ovens per year is the sum of fixed costs (\$100,000) and variable costs ((\$10/test)(5,000 tests) = \$50,000), or \$150,000. Total expected testing costs if Jackson Company tests 7,000 microwave ovens per year is the sum of fixed costs (\$100,000) and variable costs ((\$10/test)(7,000 tests) = \$70,000), or \$170,000.