Further suppose that production for the next year is


STEP COSTS, RELEVANT RANGE

Bellati Inc. produces large industrial machinery. Bellati has a machining department and a group of direct laborers called machinists. Each machinist is paid $50,000 and can machine up to 500 units per year. Bellati also hires supervisors to develop machine specification plans and to oversee production within the machining department. Given the planning and supervisory work, a supervisor can oversee, at most, three machinists. Bel- lati's accounting and production history shows the following relationships between number of units produced and the costs of materials handling and supervision (measured on an annual basis):

Units Produced

Direct Labor ($)

Supervision ($)

0-500

36,000

40,000

501-1,000

72,000

40,000

1,001-1,500

108,000

40,000

1,501-2,000

144,000

80,000

2,001-2,500

180,000

80,000

2,501-3,000

216,000

80,000

3,001-3,500

252,000

120,000

3,501-4,000

288,000

120,000

Required:

1. Prepare a graph that illustrates the relationship between direct labor cost and number of units produced in the machining department. (Let cost be the vertical axis and number of units produced the horizontal axis.) Would you classify this cost as a strictly variable cost, a fixed cost, or a step cost?

2. Prepare a graph that illustrates the relationship between the cost of supervision and the number of units produced. (Let cost be the vertical axis and number of units produced the horizontal axis.) Would you classify this cost as a strictly variable cost, a fixed cost, or a step cost?

3. Suppose that the normal range of activity is between 1,400 and 1,500 units and that the exact number of machinists are currently hired to support this level of activity. Further suppose that production for the next year is expected to increase by an additional 500 units. By how much will the cost of direct labor increase? Cost of supervision?

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Financial Accounting: Further suppose that production for the next year is
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