ASSIGNMENT #1

McGovern is a car manufacturing company. It builds 2 types ofcars: a sports car and a sports utility vehicle (SUV). Its vehiclesare very popular among its customers. Recently, increased demandfor both vehicles has caused the company to revisit its totalnumber of cars to produce and unit costs for those vehicles. Eachsports car generates 10 kilowatt hours of energy to be produced andeach SUV requires 20 kilowatt hour of energy to be produced. Eachkilowatt hour costs .25. The following chart breaks down McGovern’sexpenses for producing the companies.  Presume theproduction of the sports car and SUV’s are split equally betweenthe two vehicles.

Operating Costs	Amount
Insurance……………………………………………	$6,000 per month
Rent…………………………………………………	$15,000 per month
Salaries………………………………………………	$30,000 per month
Electricity……………………….………………….....	Sports car: 10-kilowatt hours of energy SUV:         20 kilowathours of energy
Shipping costs………………………….....................	Sports cars: $1,000 for the first 2000 sports car shipped + 1dollar per each additional vehicle shipped SUV: $1,000 for the first 1500 SUV shipped + 1.50 dollars pereach additional vehicle shipped

McGovern normally produces 2000 sports cars and 1500 SUV’s. Theincreased demand has the company estimating production needing toincrease to 3500 sports cars and 3000 SUV’s. However, McGovern hasthe capacity to produce 5000 sports cars and 4000 SUV’s.

For this assignment, please do the following:

1.      Develop a graphicalanalysis of the operating costs in relation to the units producedfor the sports car and SUV. Following the development of thegraphs, provide an explanation of your graphs discussing therelationship of the costs with respect to the number of unitsproduced.

2.      Determine the behavior perunit costs in relation to the fixed costs and variable costs andexplain what takes place when you increase and decrease the numberof units of the sports car and the SUV. (It may be best to create atable for each vehicle.)

3.      Determine the fixed costper unit for each vehicle if it is at normal production, productiondue to increased demand, and if McGovern were to produce thevehicles at maximum capacity production. After calculating thefixed cost per unit for each vehicle, provide an explanation as towhat happens to the fixed costs as the number of units increasewith each production increase. Please be sure to show the work doneto reach your conclusions.

4.      Finally, based on the costinformation provided and the calculation you have performed,determine whether the company should maintain production, increaseproduction based on demand, or produce at maximum capacity andprovide an explanation as to why your selected option is the bestoption.