Photo Co. operates four film developing plants in upstate New York. The four plants are identical. They employ the same production technology, process the same mix, and buy raw materials from the same companies at the same prices. Wage rates are also the same at four plants. In reviewing the operating results for December, the newly hired assistant controller, Mike, became quite confused over the numbers.
Plant A Plant B Plant C Plant D
Number of Rolls processed 50,000 55,000 60,000 65,000
Revenue ($000s) $500 $550 $600 $650
Less:
Variable costs (195) (242) (300) (298) (352)
Fixed costs (300) (300) (300) (300)
Profit (loss) $5 $8 $2 $2
Mike remembered from his Accounting class that as volume increases, the average fixed cost per unit falls, and so Mike expected Plant D to be more profitable that Plants A and B. But numbers show just the opposite.
Required:
1. Write a concise memo to Mike to help him understand what is going on and to eliminate his confusion.
Justify your points with appropriate calculations.