Question

E6-20A (similar to) Question Help Parish 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, Dale Parish, erroneously uses the average cost per unit at full capacity to predict total costs at a volume of 2,000 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.) 2,000 Garments 3,500 Garments $ 2,450 5,000 Garments Total variable costs Total fixed costs Total operating costs Variable cost per garment Fixed cost per garment Average cost per garment

Answer 1

1.

	2,000 Garments	3,500 Garments	5,000 Garments
Total variable costs	2,000 x 0.7 = 1,400	2,450	5,000 x 0.7 = 3,500
Total fixed costs	7,000	3,500 x 2 =7,000	7,000
Total operating costs	8,400	9,450	10,500
Variable cost per garment	0.7	2,450/3,500 = 0.7	0.7
Fixed cost per garment	7,000/2,000 = 3.5	2	7,000/5,000 = 1.4
Average cost per garment	4.2	2.7	2.1

Formula used :

Variable cost per unit = Total variable cost / Number of units                       

Total variable cost = Variable cost per unit x Number of units      

Fixed cost per unit = Total fixed cost / Number of units   

Total fixed cost does not change within the relevant range of output.      

2.

Average cost per garment decreases with the increase in output and average cost per garment increase with the decrease in output. It happens since total fixed cost does not change with the increase or decrease in output.

3.

Total cost of 2,000 garments calculated by Dale Parish = 2,000 x 2.1

= $4,200

Actual total cost of 2,000 garments = 2,000 x 4.20

= $8,400

Thus, owner under estimated total costs by $4,200 (8,400-4,200).

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