Question

E3-46B Forecast costs at different volumes (Learning Objectives 1 & 2) Renaud Dry Cleaners has capacity to clean up to 6,000 garments per month. 3,000 Garments 4,500 Garments $3,375 6,000 Garments Total variable costs Total fixed costs Total operating costs Variable cost per garment Fixed cost per garment Average cost per garment Requirements 1. Complete the following schedule for the three volumes shown. 2. Why does the average cost per garment change? 3. The owner, Guy Renaud, uses the average cost per unit at full capacity to predict total costs at a volume of 3,000 garments. Does he overestimate or underestimate his total costs? By how much?

Answer 1

Fixed cost per unit when production is 4,500 units = $2

Total fixed cost when 4,500 units are produced = 4,500 x 2

= $9,000

Total fixed cost will remain same at $9,000 even when output is changed to 3,000 units or 6,000 units.

Total variable cost at 4,500 units = $3,375

Variable cost per unit = 3,375/4,500

= $0.75

Variable cost per unit does not change at different levels of output.

	3,000 Garments	4,500 Garments	6,000 Garments
Total variable costs	3,000 x 0.75 = 2,250	3,375	6,000 x 0.75 = 4,500
Total fixed costs	9,000	9,000	9,000
Total operating costs	11,250	12,375	13,500
Variable cost per garment	0.75	0.75	0.75
Fixed cost per garment	9,000/3,000 = 3	2	9,000/6,000 = 1.5
Average cost per garment	$3.75	$2.75	$2.25

2.

Average cost per garment decrease with the increase in output since total fixed cost does not increase when output increase and thus fixed cost per unit decreases ultimately average cost per garment decrease with increase in output.

3.

Average cost per unit at full capacity of 6,000 units = $2.25

Total cost predicted by owner for 3,000 units = 3,000 x 2.25

= $6,750

Actual total cost of 3,000 units = 3,000 x 3.75

= $11,250

The owner under estimated his total cost.

Under estimated cost = Actual total cost of 3,000 units - Total cost predicted by owner for 3,000 units

= 11,250-6,750

= $4,500

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