Company Axis is considering the addition of purchasing new equipment in one of its production depart

Company Axis is considering the addition of purchasing new equipment in one of its production departments. They currently produce 50,000 units a year with average unit costs of $50 for direct materials, $30 for direct labor (2 hours @ 15 per hour) and $20 for fixed overhead. Both direct materials and direct labor are variable costs. The ratio of unit fixed costs to unit variable costs (direct materials plus direct labor) is currently 25% ($20 ÷ $80). The new equipment will increase total fixed overhead costs in the department by $500,000 per year which will make production more capital-intensive. With this production will be doubled to 100,000 units a year using the same total number of direct labor hours per year as with the current equipment. Direct materials cost will be unchanged ($50.) Which of the following would be the predicted ratio of unit fixed costs to unit variable costs if the new equipment is purchased.

A. 15.38%

B. 23.08%

C. 18.75%

D. 30.77%

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