Question

Pastore Drycleaners has capacity to clean up to 5,000 garments per month. Requirement: 1. Complete the schedule below for the three volumes shown. 2. Why does the average cost per garment change? 3. Suppose the owner, Damien Pastore, erroneously uses the average cost per unit at full capacity to predict total costs at a volume e Requirement 1. Complete the following schedule for the three volumes shown. (Round all unit costs to the nearest cent and all total.com 2,000 3,500 5,000 Garments Garments Garments Total variable costs 2,975 Total fixed costs Total operating costs Variable cost per garment Fixed cost per garment Average cost per garment Requirement 2. Why does the average cost per garment change? The average cost per garment changes as volume changes, due to the component of the dry cleaner's costs. The cos Requirement 3. Suppose the owner, Damien Pastore, erroneously uses the average cost per unit at full capacity to predict total costs at a Choose from any list or enter any number in the input fields and then continue to the next question.

Answer 1

Total fixed cost = $2 X 3,500 = $7,000

Total Fixed cost does not change with the number of units produced. Fixed cost per unit changes with change in number of units produced.

Variable cost per unit remains constant while total variable costs changes with the change in numbers of units produced.

Variable cost per unit = $2,975 / 3,500 = $0.85

Total variable cost = Number of units produced X Variable cost per unit

Fixed cost per unit = Total fixed cost / Garments produced

1.

	2,000 Garments	3,500 Garments	5,000 Garments
Total variable cost	$1,700	$2,975	$4,250
Total fixed cost	$7,000	$7,000	$7,000
Total operating costs	$8,700	$9,975	$11,250
Variable cost per garment	$0.85	$0.85	$0.85
Fixed cost per garment	$3.50	$2	$1.40
Average cost per garment	$4.35	$2.85	$2.25

2.

The average cost per garment changes as the volume changes, due to the fixed cost component of the dry cleaners cost. The fixed cost per unit decreases as volume increases while the variable cost per unit remains the same.

3.

Actual cost for 2,000 garments = $8,700

Cost using average cost at full capacity = 2,000 X $2.25 = $4,500

Cost is underestimated by $4,200 ($8,700 - $4,500)

He would underestimate his cost by $4,200.