Problem 1 An engineering production facility has developed a new device to be ad

Question

Problem 1 An engineering production facility has developed a new device to be added to their line of products. The expenses based on the number of units produced are given in the table below Number of Units Machinery cost Labor per per Hour up to 2,000 4,000 Power Sale Price per hour $300 $300 hour $1,400 $1,600 $0.4/Unit $2.0/Unit $0.4/Unit $2.0/Unit Determine the following 1. The average cost per unit for each of the 2 tiers based on the number of produced units. Each tier will be considered separately 2. The fixed cost for each of the 2 tiers 3. The variable cost for each of the 2 tiers 4. The marginal cost to move from Tier 1 to Tier 2 5. The total cost if the number of units is 3,800 6. The total revenue if the number of units is 3,800 7. The profit or loss if the number of units is 3,800 8. Draw a chart showing the fixed cost, variable cost, total cost and revenue

Explanation / Answer

1) Let the no. of units be produced be N1 for Tier 1.

Total cost = 300 + 1400 + 0.4N1

Average Cost = Total Cost/N1

Average Cost = (1700 + 0.4N1)/N1

Average Cost = 1700/N1 + 0.4

Let the no. of units be produced be N2 for Tier 2.

Total cost = 300 + 1600 + 0.4N2

Average Cost = Total Cost/N2

Average Cost = (1900 + 0.4N2)/N2

Average Cost = 1900/N2 + 0.4

2) Fixed Cost for Tier 1:

This won't be dependent on number of units.

Fixed Cost = $300 + $1400 = $1700

Fixed Cost for Tier 2:

This won't be dependent on number of units.

Fixed Cost = $300 + $1600 = $1900

3) Variable Cost for Tier 1:

This will be dependent on number of units.

Variable Cost = (0.4)xN1 = 0.4N1

Variable Cost for Tier 2:

This will be dependent on number of units.

Variable Cost = (0.4 )xN2 = 0.4N2

4) The marginal cost to move from Tier 1 to Tier 2 is $200.

5) If number of units = $3800,

Total Cost = $300 + $1600 + (0.4)(3800)

Total Cost = $1900 + $1520 = $3,420

6) Total Revenue = 3800 x 2 = $7600

7) Profit = 7600 - 3420 = $4,180

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