Manufacturing: Costs and versus Variable Costs Essay

Submitted By moonlit86
Words: 373
Pages: 2

Executive Summary

Lee High had made calculations based upon a static volume of sales and production. He was also calculating only the cost of goods sold and did not take into consideration the respective amounts of fixed versus variable costs. While the fixed costs remain constant in total, when the volume of goods produced and sold increases, the amount of fixed cost attributed to each individual unit goes down. Following this logic the variable cost per unit will remain constant on a per unit basis, assuming a constant level of efficiency of production. This leads us to the inevitable conclusion that as production increases, the cost of goods sold will increase overall, but will decrease on a per unit basis. Thus Blackheath can maintain a healthy profit margin, charging a lower price, assuming that the volume increases accordingly.

With respect to the situation that has been defined in this case study; we have drawn the following conclusions. Lee HighЎ¦s decision matrix was fundamentally flawed since he had based everything upon an assumption of 500 units per week sales (p.35), not taking into account the cost fluctuation if production deviates. Lee High also calculated fixed costs incorrectly (p.34) grossly understating them. Mr. Blackheath would lose money in the long run by adopting the new sales strategy of 15% commission for the salesmen who sold Great Heath for a price of $8.00 (p.37). Mr. Blackheath should have promoted, or at least congratulated Adelaide…