How to Break Down Erkkila Inc.'s Inspection Costs
What are the total variable and fixed inspection costs for Erkkila Inc. at an activity level of 6,500 machine-hours?
Based on the information provided, how can Erkkila Inc.'s total inspection cost be broken down?
Breakdown of Inspection Costs
At an activity level of 6,500 machine-hours, Erkkila Inc.'s total inspection cost is $582,202. This includes $423,830 in variable inspection costs and $158,372 in fixed inspection costs.
Understanding Inspection Costs for Erkkila Inc.
Erkkila Inc. reports that at an activity level of 6,500 machine-hours in a month, its total variable inspection cost is $423,830 and its total fixed inspection cost is $158,372. The fixed inspection cost remains constant regardless of the level of activity.
Variable inspection costs are those that vary with the level of activity, in this case, machine-hours. On the other hand, fixed inspection costs remain constant regardless of the level of activity.
Knowing the breakdown of inspection costs is crucial for companies to make informed decisions about pricing, production levels, and overall profitability. If a company cannot cover its fixed costs with revenue, it may suffer losses even with product sales.