Question

Petrov Drycleaners has capacity to dean up to 7.500gments 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 Donald Petrov, erroneously uses the average cost per unit full capacity to predict total costs at a volume of 4.500 garments would he overstimate or underestimate is total costs? By how much? Requirement 1. Complete the following schedule for the three volumes shown Round n ot to the nearest bent and to the nearest whole 4.500 Garments 6.000 Garmente 7,500 Garments Total variable costs Totaled costs Total operating costs Variable cost per garment Fixed cost per garment Average cost per garment

Answer 1

Petrov Drycleaners ($)

	4,500 Garments	6000 Garments	7500 Garments
Total variable cost	4,500×0.50 = $ 2,250	$ 3000	7,500×0.50 = $ 3,750
Total fixed cost*	$ 12,600	6000×2.10 = $ 12,600	$ 12,600
Total operating cost (variable + fixed)	2,250+12,600 = $ 14,850	3,000+12,600 = $ 15,600	3,750+12,600 = $ 16,350
Variables cost per Garment**	$ 0.50	3000/6000 = $ 0.50	$ 0.50
Fixed cost per Garment	12,600/4,500 = $ 2.80	$ 2.10	12,600/7,500 = $ 1.68
Average cost per Garment (variable + fixed)	0.50+2.80 = $ 3.30	0.50+2.10 = $ 2.60	0.50+1.68 = $ 2.18

* Total fixed cost always constant, fixed cost per unit varies.

** Total Variable cost varies with no of units, but variable cost per unit always constant.

b) Fixed cost per unit decreases with Increase in the production units, and variable cost per unit always constant, hence the average cost per unit decreases with Increase in the Garments.

c) average cost at full capacity $ 2.18

Total cost at volume of 4,500 garments = 4,500 × $ 2.18 = $ 9,810

Actual cost at 4,500 garments = $ 14,850

Understatement of cost (14,850 - 9,810) by $ 5,040