Question: A soft drink company has three bottling plants throughout the country. Bottling occurs at the regional level because of the high cost of transporting bottled soft drinks. The parent company delivers each plant with the syrup. The bottling plants combine the syrup with carbonated soda to make and bottle the soft drinks. The bottled soft drinks are then sent to regional grocery stores.
The bottling plants are treated as costs centers. The managers of the bottling plants are evaluated based on minimizing the cost per soft drink bottled and delivered. Each bottling plant uses the same machine, but some produce more bottles of soft drinks because of different demand. The costs and output for each bottling plant are:
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A
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B
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C
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Units Produced
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$10,000,000
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20,000,000
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30,000,000
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Variable Costs
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200,000
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$450,000
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$650,000
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Fixed Costs
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1,000,000
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$1,000,000
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$1,000,000
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[A] Calculate the average cost per unit for each plant.
[B] Why would the manager of plant A be unhappy with using the average cost as the performance measure?
[C] Determine alternative performance measure that would make the manager of plant A happier?
[D] Under what circumstances might the average cost be a better performance measure?