Question

Perreth Drycleaners has capacity to clean up to 6,000 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, Donald Perreth, erroneously uses the average cost per unit at full capacity to predict total costs at a volume of 3,000 garments. Would he overestimate or underestimate his total costs By how much? 3,000 4,500 6,000 Garments Garments Garments Total variable costs Total fixed costs Total opcrating costs 3,150 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 Requirement 3. Suppose the awner, Danald Perreth, erroneously uses the average cost per unit at fuW cepacity to predict total costs at a volume of 3,000 garments Would he overestimate or underestimate his total costs? By how much? He would 2.20 coiponent of the dry cleaner's costs. The Vcost per unit decreases as volume V, while the variable cost per uit his costs by $ Choose from any list or enter any number in the input fields and then continue to the next question.

Answer 1

1		Garments
		3000	4500	6000
	Total Variable cost	$       2,100	$             3,150	$             4,200
	Total Fixed cost per year	$       9,900	$             9,900	$             9,900
	Total operating costs	$     12,000	$           13,050	$           14,100
	Variable cost per garment	$         0.70	$               0.70	$               0.70
	Fixed cost per garment	$         3.30	$               2.20	$               1.65
	Average cost per garment	$         4.00	$               2.90	$               2.35
	Workings:
	4500 garments
	Variable cost per unit	=	$3150 /4500 garments
		=	$               0.70
	Total Fixed cost	=	$2.20 X 4500 garments
		=	$             9,900
	3000 garments
	Total Variable cost	=	$0.70 X 3000 garments
		=	$             2,100
	Fixed cost per unit	=	$9900 /3000 garments
		=	$               3.30
	6000 garments
	Total Variable cost	=	$0.70 X 6000 garments
		=	$             4,200
	Fixed cost per unit	=	$9900 /6000 garments
		=	$               1.65
	Note: Fixed cost per year will remain same irrespective of number units whereas it will change in case of Fixed cost per unit also Variable cost per unit will remain same and it will change in total.
2	The average cost per garment changes as volume changes due to fixed component of the dry cleaner's cost. The fixed cost per unit decrease as volume increases, while the variable costs per unit remains constant.
3	He would underestimate his cost by $4950
	[(3000 garments X ($4 - $2.35)] = $4950