I have no idea how to slove this please help. Pierce Drycleaners has capacity to

ID: 2587474 • Letter: I

Question

I have no idea how to slove this please help.

Pierce Drycleaners has capacity to clean up to

6,000

garments per month.

Requirements

Complete the schedule below for the three volumes shown.

Why does the average cost per garment change?

DaleDale

PiercePierce,

3 comma 0003,000

hehe

hishis

Requirement 1. Complete the following schedule for the three volumes shown. (Round all unit costs to the nearest cent and all total costs to the nearest whole dollar.)

3,000

4,500

6,000

Garments

Total variable costs

$4,050

Total fixed costs

Total operating costs

Variable cost per garment

Fixed cost per garment

$2.20

Average cost per garment

Complete the schedule below for the three volumes shown.

Why does the average cost per garment change?

Suppose the owner,

DaleDale

PiercePierce,

erroneously uses the average cost per unit at full capacity to predict total costs at a volume of

3 comma 0003,000

garments. Would

hehe

overestimate or underestimate

hishis

total costs? By how much?

Explanation / Answer

3,000 Garments

4,500 Garments

6,000 garments

Total Variable Cost(@0.9)

2,700

4,050

5,400

Total Fixed Cost

9,900

Total Operating Cost

12,600

13,950

15,300

Variable cost per unit

0.9

Fixed cost per unit

3.3

2.2

1.65

Average Cost per unit

4.2

3.1

2.55

Total Variable Cost at 4500 units = $4,050

Variable cost = Cost per unit * No. of Units

Variable cost per unit = $0.9 per unit ($4050 / 4500 units)

Variable cost will change with the change in units

Fixed Cost per garment at 4500 units = $2.2

Total Fixed Cost = $9,900 ($2.2 * 4500 units)

Fixed Cost will be same irrespective of the no. of units produced.

Variable cost per unit = Total Variable cost / No. of units

Fixed cost per unit = Total Fixed cost / No. of units

Average Cost per unit = Variable cost per unit + Fixed cost per unit

Average cost is the cost of producing one unit. It is directly related to the no. of units. I.e. if the no. of units will increase then the average cost will decrease and Vice-versa.

This is because when the production increases the company will only have to incur only variable cost as fixed cost will remain the same this will decrease the average cost per unit.

As after increase in production the fixed cost will be shared by more units then before thus resulting in decrease in overall cost of the product.

If the owner uses Average cost of Full capacity to find the cost of 3000 units.

Cost of 3000 units at Average cost of full capacity = Average cost of full capacity * 3000 Units

= $2.55 * 3000 units

Cost of 3000 units at Average cost of full capacity = $7,650

It is underestimated by $4,950 (12,600 – 7,650)