Ridgeway Print makes a product in batches of 2,000 units. Each batch incurs a set-up cost of £600. Each unit needs direct materials of £4.50 and 0.2 direct labour hours paid at £15 per hour. Production overhead is absorbed at £12 per direct labour hour. On inspection, 5% of the units in every batch are normally rejected and scrapped, with no scrap value. What is the production cost per good unit (to the nearest penny)?

Correct answer: D) £10.74

Explanation

Cost per unit made = materials £4.50 + labour (0.2 x £15) £3.00 + overhead (0.2 x £12) £2.40 = £9.90. Batch cost = (2,000 x £9.90) + set-up £600 = £19,800 + £600 = £20,400. Good units = 2,000 x 95% = 1,900. Cost per good unit = £20,400 / 1,900 = £10.7368, or £10.74 to the nearest penny. The full batch cost, including the cost of rejected units, is carried by the good output; dividing by 2,000 units (£10.20) ignores the rejects.