Richardson Corporation plans to increase its advertising budget by 20% next year. The company currently spends $15,000 on advertising costs. In addition to advertising, Richardson spends $50,000 per year for other fixed costs and $10 per unit for variable costs. If Richardson anticipates producing 30,000 units next year, what will be next year's total costs?

Calculate total estimated costs for next year.

Expert Answers

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Variable costs change per unit of output, and fixed costs are the same (or “fixed”) regardless of how many units are produced. If total costs were expressed as a function of units in the form of a linear equation in y=my+b form, the fixed costs would be the “b” (y-intercept) term, and the variable costs would be the “m” (slope) term.

Advertising costs can be calculated as follows:

$15,000*1.2 (reflecting a 20% increase) = $18,000.

Next, additional fixed costs are $50,000. This yields a total fixed cost of $18,000 (advertising) + $50,000 (other) = $68,000.

Now, the total costs are: $10 (per unit)* 30,000 (units) + $68,000 = $368,000.

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