3 March 2017

Is the company correct in its practice of not manufacturing standard model compressors on Sundays because of the accounting loss incurred on each unit? As per the cost structure given in the case, Selling costs, Sales and Administration costs, Depreciation and other manufacturing overheads have been considered to be variable costs, i. e. per unit costs and hence have been accounted for in the calculation of profit and loss.

As such, this methodology is resulting in a loss of $900 for every Sunday that the plant is operated. Therefore, if the present cost structure is used no production should be done on Sunday since it is clearly unprofitable. However, on a closer analysis, a few irrelevant costs like Selling expenses and General and Administration costs can be excluded, since they do not vary by the volume of production. Hence, even if the plant operates on a Sunday no incremental costs will be incurred for these particular items.

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