Tesla Motors assembles the fully electric Model S-85 automobile at its Fremont, California, plant. The standard variable manufacturing cost per vehicle in 2017 is $58,800, which consists of: Direct materials $36,000 Direct manufacturing labor Variable manufacturing overhead $10,800 $12,000 Variable manufacturing overhead is allocated to vehicles on the basis of assembly time. The standard as- sembly time per vehicle is 20 hours. The Fremont plant is highly automated and has a practical capacity of 4,000 vehicles per month. The budgeted monthly fixed manufacturing overhead is $45 million. Fixed manufacturing overhead is allocated on the basis of the standard assembly time for the budgeted normal capacity utilization of the plant. For 2017, the budgeted normal capacity utilization is 3,000 vehicles per month. Tesla started production of the Model S-85 in 2017. The actual production and sales figures for the first three months of the year are: January February March Production Sales 3,200 2,000 2,400 2,900 3,800 3,200 Franz Holzhausen is SVP of Tesla and director of the Fremont plant. His compensation includes a bonus that is 0.25% of monthly operating income, calculated using absorption costing. Tesla prepares absorption- costing income statements monthly, which include an adjustment for the production-volume variance oc- curring in that month. There are no variable cost variances or fixed overhead spending variances in the first three months of 2017. The Fremont plant is credited with revenue (net of marketing costs) of $96,000 for the sale of each Tesla S-85 vehicle.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
How much would the use of variable costing change Holzhausen’s bonus each month if the same 0.25% figure were applied to variable-costing operating income?
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