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Exercise 3-48 Average Cost Company A has 50% of its total variable manufacturing...

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Accounting

Exercise 3-48 Average Cost
Company A has 50% of its total variable manufacturing cost in labor and the other 50% in fuel cost.
Company B has 80% of its total variable manufacturing cost in labor and the remainder in fuel cost.
Suppose in a given year labor costs rise 5% and fuel costs rise 10%.
Required
Which company has the higher percentage increase in total variable cost?
Solution (15 min)
The increase in total variable manufacturing cost, averaging both labor and fuel costs, is
7.5% for Company A and 6% for Company B. The increase is higher for Company A
because it has a higher percent of fuel costs, which have risen faster than labor costs.
This result holds for whatever amounts are given for fuel and labor costs, as long as the
costs are in the prescribed percentage relationship
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