Computing and interpreting manufacturing unit costs

Minnesota Office Products (MOP) produces three different paper products at its Vaasa lumber plant: Supreme, Deluxe, and Regular. Each product has its own dedicated production line at the plant. It currently uses the following three-part classification for its manufacturing costs: direct materials, direct manufacturing labor, and manufacturing overhead costs. Total manufacturing overhead costs of the plant in July 2014 are $150 million ($15 million of which are fixed). This total amount is allocated to each product line on the basis of the direct manufacturing labor costs of each line. Summary data (in millions) for July 2014 are as follows:

Supreme Deluxe Regular
Direct material costs $ 89 $ 57 $ 60
Direct manufacturing labor costs $ 16 $ 26 $ 8
Manufacturing overhead costs $ 48 $ 78 $ 24
Units produced 125 150 140

Required:
1. Compute the manufacturing cost per unit for each product produced in July 2014.
2. Suppose that, in August 2014, production was 150 million units of Supreme, 190 million units of Deluxe, and 220 million units of Regular. Why might the July 2014 information on manufacturing cost per unit be misleading when predicting total manufacturing costs in August 2014?

1. (in millions)
Supreme Deluxe Regular Total
Direct material cost $ 89.00 $ 57.00 $60.00 $206.00
Direct manuf. labor costs 16.00 26.00 8.00 50.00
Manufacturing overhead costs 48.00 78.00 24.00 150.00
Total manuf. costs 153.00 161.00 92.00 406.00
Fixed costs allocated at a rate
of $15M $50M (direct mfg.
labor) equal to $0.30 per
dir. manuf. labor dollar
(0.30 $16; 26; 8) 4.80 7.80 2.40 15.00
Variable costs $148.20 $153.20 $89.60 $391.00
Units produced (millions) 125 150 140
Cost per unit (Total manuf.
costs ÷ units produced) $1.2240 $1.0733 $0.6571
Variable manuf. cost per unit
(Variable manuf. costs
Units produced) $1.1856 $1.0213 $0.6400

(in millions)
Supreme Deluxe Regular Total
2. Based on total manuf. cost
per unit ($1.2240 150;
$1.0733 190; $0.6571 220) $183.60 $203.93 $144.56 $532.09
Correct total manuf. costs based
on variable manuf. costs plus
fixed costs equal
Variable costs ($1.1856 150; $177.84 $194.05 $140.80 $512.69
$1.0213 190; $0.64 220)
Fixed costs 15.00
Total costs $527.69

The total manufacturing cost per unit in requirement 1 includes $15 million of indirect manufacturing costs that are fixed irrespective of changes in the volume of output per month, while the remaining variable indirect manufacturing costs change with the production volume. Given the unit volume changes for August 2014, the use of total manufacturing cost per unit from the past month at a different unit volume level (both in aggregate and at the individual product level) will overestimate total costs of $532.09 million in August 2014 relative to the correct total manufacturing costs of $527.69 million calculated using variable manufacturing cost per unit times units produced plus the fixed costs of $15 million.