Question:
Active Exercise Machines is designing a new treadmill for the home exercise market, and is having trouble pricing the laminated rubber conveyor belt. Since Active is creating a treadmill in a non-standard length, the conveyor belt supplier will incur a setup cost, and must spread this cost over the projected number of treadmills to be produced. Since the setup cost is significant, the cost per unit will decline dramatically if Active orders more conveyor belts. The cost is $95 per unit if Active only orders 5,000 belts, and drops to $50 if Active orders 10,000 belts. Since the total cost of the treadmill is projected to be $500, this difference represents 9% of the total cost, which is significant enough to bring to the attention of management. Consequently, the cost accountant presents management with two projected costs for the treadmill - one at a unit volume of 5,000, and another at a unit volume of 10,000.