Paolucci Corporation's relevant range of activity is 8,400 units to 17,000 units. When it produces and sells 12,700 units, its average costs per unit are as follows: Average Cost per Unit Direct materials $ 7.10 Direct labor $ 4.00 Variable manufacturing overhead $ 2.00 Fixed manufacturing overhead $ 3.60 Fixed selling expense $ 1.30 Fixed administrative expense $ 0.60 Sales commissions $ 1.25 Variable administrative expense $ 0.50 If 11,700 units are sold, the variable cost per unit sold is closest to:

To find the variable cost per unit sold when 11,700 units are sold, we need to identify which costs are variable from the list provided for when 12,700 units are produced and sold. Variable costs change with the level of production or sales volume, while fixed costs stay constant within the relevant range.

Given average costs per unit for the production and sale of 12,700 units, the variable costs include: - Direct materials: $7.10 - Direct labor: $4.00 - Variable manufacturing overhead: $2.00 - Sales commissions: $1.25 - Variable administrative expense: $0.50

Now, we need to add up these variable costs to get the total variable cost per unit: Variable cost per unit = Direct materials + Direct labor + Variable manufacturing overhead + Sales commissions + Variable administrative expense Variable cost per unit = $7.10 + $4.00 + $2.00 + $1.25 + $0.50 Variable cost per unit = $14.85

Since these costs are variable, they will be the same per unit regardless of the number of units sold, as long as the activity level remains within the relevant range (8,400 units to 17,000 units). Therefore, the variable cost per unit when 11,700 units are sold is also $14.85.

Extra: Understanding costs in a business is fundamental for making managerial decisions. Managers typically categorize costs into two main types: fixed costs and variable costs. Understanding the behavior of these costs relative to business activity level (quantity of units produced and sold) is crucial for budgeting, pricing, and profit planning.

Fixed costs are expenses that do not change with the level of production or sales volume; they are incurred irrespective of the business activity level, at least within a certain range of activity known as the "relevant range." Examples of fixed costs include rent, salaries of permanent staff, depreciation, and insurance.

Variable costs, on the other hand, are costs that vary directly with the level of production or sales volume. They rise as production increases and fall as production decreases. Common examples include direct materials, direct labor, and variable portions of manufacturing overhead such as power consumption for machinery or raw materials usage.

When calculating the total costs of production or the cost per unit, it is important to distinguish between these two types of costs. Costs are also often further broken down into categories such as manufacturing costs (direct materials, direct labor, and manufacturing overhead) and non-manufacturing costs (selling, general, and administrative expenses).

Managers use this cost information for making various decisions, including setting product prices, determining product lines to expand or discontinue, and managing resources efficiently. Understanding how costs behave at different levels of activity helps managers forecast and control costs, and ultimately, improve the financial performance of the company.