Question

E6-22A (similar to) Pastore Drycleaners has capacity to clean up to 5,000 garments per month Requirements 1. Complete the schodule below for the three volumos shown. 2. Why does the average cost per garment change? 3. Suppose the owner, Donald Pastore, erroneously uses the average cost per unit af full capacity to predict total costs at a volume of 2,000 garments. Would he overestimate or underestimato his fofal costs? Ry how much? Requirement 1. Complete the following schedule for the three volumos shown (Round all unit costs to the nearest cent and all total costs to the nearest whole dollar) 2,000 3,500 5,000 Garments Garments Garments Total variable costs 2,625 Total fixed costs Total operating costs Variable cost per garment Fixed cost per garment $ 2 20 Average cost per garment Enter any number in the edit fields and then click Check Answer. Question Viewer

Answer 1

Requirement 1:

Particulars	2,000 Garments	3,500 Garments	5,000 Garments
Total Variable costs	$1,500	$2,625	$3,750
Total Fixed costs	$7,700	$7,700	$7,700
Total Operating Costs	$9,200	$10,325	$11,450
Variable cost per unit	$0.75	$0.75	$0.75
Fixed cost per unit	$3.85	$2.20	$1.54
Average cost per garment	$4.60	$2.95	$2.29

Working Notes:

Variable cost per unit:

Variable cost per unit = $2,625 / 3,500 garments = $0.75 per garment

Variable cost:

For 2,000 garments = 2,000 garments * $0.75 per garment = $1,500

For 5,000 garments = 5,000 garments * $0.75 per garment = $3,750

Fixed cost:

Fixed cost is constant in amount and changes in per unit. Fixed cost per unit = $2.20 per unit

Therefore, fixed cost = 3,500 garments * $2.20 per garment = $7,700

Fixed cost per unit:

For 2,000 garments = $7,700 / 2,000 garments = $3.85 per garment

For 5,000 garments = $7,700 / 5,000 garments = $1.54 per garment

Average cost per unit

Average cost per unit = Total operating cost / Units

For 2,000 garments = $9,200 / 2,000 garments = $4.60 per garment

For 2,000 garments = $10,325 / 3,500 garments = $2.95 per garment

For 5,000 garments = $11,450 / 5,000 garments = $2.29 per garment

Requirement 2:

The average cost per garment changes as the volume changes, due to the fixed cost component of the dry cleaners cost. The fixed cost per unit decreases as volume increases while the variable cost per unit remains the same.

Requirement 3:

Total operating cost of 2,000 garments = $9,200

Average cost per unit at full capacity (5,000 garments) = $2.29

Total cost of 2,000 garments at full capacity = 2,000 garments * $2.29 per garment = $4,580

Cost is underestimated by $4,620 ($9,200 - $4,580)

Underestimate cost by $4,620

All the best...