Question

Perreth Drycleaners has capacity to clean up to 8,000 garments per month. Requirements 1. Complete the schedule below for the three volumes shown. 2. Why does the average cost per garment change? 3. Suppose the owner, Dustin Perreth, erroneously uses the average cost per unit at full capacity to predict total costs at a volume of 5,000 garments. Would he overestimate or underestimate his total costs? By how much? 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.) 5,000 Garments 6,500 Garments 5,525 8,000 Garments Total variable costs Total fixed costs Total operating costs Variable cost per garment Fixed cost per garment Average cost per garment

Answer 1

Answer 1

	5,000	6,500	8,000
Total variable cost	$   4,250	$   5,525	$   6,800
Total fixed cost	$ 15,600	$ 15,600	$ 15,600
Total operating cost	$ 19,850	$ 21,125	$ 22,400
Variable cost per garment	$     0.85	$     0.85	$     0.85
Fixed cost per garment	$     3.12	$     2.40	$     1.95
Average Cost per garment	$     3.97	$     3.25	$     2.80

Answer 2

As the units increase the average cost decreases because the fixed cost does not change.

Answer 3

Total cost = $ 3.97 * 8,000 = $ 31,760

Actual cost = $ 22,400

He overestimates his cost by $ 9,360.

In case of any doubt, please comment.