Accounting for Decision Making and Control 7th Edition by Jerold Zimmerman

Exercise 8

Fast Photo
Fast Photo operates four film developing labs in upstate New York. The four labs are identical: They employ the same production technology, process the same mix of films, and buy raw materials from the same companies at the same prices. Wage rates are also the same at the four plants. In reviewing operating results for November, the newly hired assistant controller, Matt Paige, became quite con­fused over the numbers: Upon further study, Matt learned that each plant had fixed overhead of $300,000. Matt remem­bered from his managerial accounting class that as volume increases, average fixed cost per unit falls. Because Plant D had much lower average fixed costs per roll than Plants A and B, Matt expected Plant D to be more profitable than Plants A and B. But the numbers show just the opposite. Write a concise but clear memo to Matt that will resolve his confusion.