PoundPound Drycleaners has capacity to clean up to 5 comma 0005,000 garments per
ID: 353680 • Letter: P
Question
PoundPound
Drycleaners has capacity to clean up to
5 comma 0005,000
garments per month.
Requirements
1.
Complete the schedule below for the three volumes shown.
2.
Why does the average cost per garment change?
3.
DavidDavid
PoundPound,
2 comma 0002,000
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.)
2,000
3,500
5,000
Garments
Garments
Garments
Total variable costs
$2,800
Total fixed costs
Total operating costs
Variable cost per garment
Fixed cost per garment
$2.20
Average cost per garment
1.
Complete the schedule below for the three volumes shown.
2.
Why does the average cost per garment change?
3.
Suppose the owner,DavidDavid
PoundPound,
erroneously uses the average cost per unit at full capacity to predict total costs at a volume of2 comma 0002,000
garments. Wouldhehe
overestimate or underestimatehishis
total costs? By how much?Explanation / Answer
1.
Given
2,000
3,500
5,000
Garments
Garments
Garments
Total variable costs
$2,800
Total fixed costs
Total operating costs
Variable cost per garment
Fixed cost per garment
$2.20
Average cost per garment
STEP 1
First, calculate the variable cost per garment.
The variable unit cost remains the same for changing production volume, only the total variable costs changes
Also, the total fixed costs do not change with production volume
For 3,500 production level,
The variable cost per garment= Total variable costs/ Total number of garments
=2800/3500= $0.8
Total fixed costs = Fixed cost per garment* Total number of garments
=3500*2.2=7700
Total Operating Cost = Fixed + Variable Costs = 7700+2800=10500
Average cost per garment = Total Operating Cost/ Total number of garments (Or fixed cost per unit+Varicable cost per unit) = 10500/3500=$3
STEP 2
The variable unit cost remains the same for changing production volume , only the total variable costs changes
Also the total fixed costs does not change with production volume
The variable cost per garment= $0.8
Total fixed costs =$7700
Total number of garments=2000
Total variable costs = variable cost per garment * Total number of garments == 0.8*2000 =1600
Total Operating Cost = Fixed + Variable Costs = 7700+1600=9300
Fixed cost per garment= Total fixed costs/ Total number of garments =7700/2000 =3.85
Average cost per garment = Total Operating Cost/ Total number of garments = 9300/2000= 4.65
STEP 3
From above,
The variable cost per garment= $0.8
Total fixed costs =$7700
Total number of garments=5000
Total variable costs = variable cost per garment * Total number of garments == 0.8*5000 =4000
Total Operating Cost = Fixed + Variable Costs = 7700+4000=11700
Fixed cost per garment= Total fixed costs/ Total number of garments =7700/5000 =1.54
Average cost per garment = Total Operating Cost/ Total number of garments = 11700/5000= 2.34
2,000
3,500
5,000
Garments
Garments
Garments
Total variable costs
1600
2,800
4000
Total fixed costs
7700
7700
7700
Total operating costs
9300
10,500
11,700
Variable cost per garment
0.8
0.8
0.8
Fixed cost per garment
3.85
2.2
1.54
Average cost per garment
4.65
3
2.34
2.
The average cost per garment is composed of fixed cost per unit and variable cost per unit. The variable cost per unit remains the same for changing volume. But the fixed cost per unit changes with a change in volume i.e. the distribution of fixed cost across units changes with changing volume
.
3.
Full capacity =5000 units
Average cost per unit at full capacity (5000 units)= 2.34 (from question 1)
Total costs based on the above average cost per unit =2000*2.34 =$ 4680
But the actual total cost for a volume of 2000 (from question 1) =$9300
The actual cost is much higher than the estimated one 9300-4680 = $4620
Dave would have underestimated by $4620
2,000
3,500
5,000
Garments
Garments
Garments
Total variable costs
$2,800
Total fixed costs
Total operating costs
Variable cost per garment
Fixed cost per garment
$2.20
Average cost per garment
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