Question

E6-20A (similar to) Pillard Drycleaners has capacity to clean up to 5,000 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, Davis Pard, erroneously uses the average cost per unit a l capacity to predict total costs at a volume of 2.000 garments. Would be 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 contando tal cost to the nearest whole dollar) 3.500 5.000 Tot variable costs Total fed costs Total operating costs Variable cost per garment Fixed cost per garment Average cost per garment

Answer 1

	2000 garments	3500 garments	5000 garments
total variable costs	1,300	2,275	3,250
total fixed costs	8,400	8,400	8,400
total operating costs	9,700	10,675	11,650
variable cost per garment	0.65	0.65	0.65
fixed cost per garment	4.20	2.40	1.68
average cost per garment	4.85	3.05	2.33

working:

variable cost per unit = total variable costs / number of garments

=>$2,275 / 3500 garments

=>$0.65 per unit

Total variable costs = variable cost per unit * number of garments

=>$0.65 *2000

=>$1,300.

$0.65*3500

=>$2,275.

$0.65*5000

=>$3,250.

Total fixed costs = fixed cost per unit * 3500 garments

=>$2.40*3500

=>$8,400.

fixed cost per garment = total fixed cost / number of garments

for 2000 garments

=>$8400/2000

=>$4.20

for 3500 garments

=.$8400/3500

=>$2.40

for 5000 garments

=>$8400 / 5000 garments

=>$1.68

required 2:

Average cost per garment changes due to fixed costs.

Fixed cost per unit decreases as the number of garments increase.

required 3:

under estimate by $5,040.

working:

actual costs for 2000 units= $4.85 * 2000 =>$9700.

total cost if average cost at full cost is used = $2.33*2000

=>$4,660.

so since actual costs are higher, there is an underestimate by $9700-4660

=>$5,040.