Question

Pierce 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 Pierce, 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 3,325 5,000 Garments Total variable costs Total fixed costs Total operating costs

Answer 1

1)	2,000 garments	3,500 garments	5,000 garments
Total variable costs	$ 1,900	$ 3,325	$ 4,750
Total fixed costs	$ 7,000	$ 7,000	$ 7,000
Total operating costs	$ 8,900	$ 10,325	$ 11,750

Variable cost per garment	$ 0.95	$ 0.95	$ 0.95
Fixed cost per garment	$ 3.50	$ 2.00	$ 1.40
Average cost per garment	$ 4.45	$ 2.95	$ 2.35

2) Average cost per garment change due to change in output service . Because due to increase in output service, total fixed cost remain same but per unit fixed cost gets reduced and vise versa . Ultimately which reduce average cost per garment when output increase and vise versa ,because variable cost per garment remain same in each level of service output .

3) Average cost per garment in 5,000 garment level is $ 2.35 If such average cost is taken to predict total cost in 2,000 level of output, then predicted cost = 2,000 X $ 2.35 = $ 4,700. Then it underestimate his total estimated cost in 2,000 garment level by [ $ 8,900 - $ 4,700] = $ 4,200.