Question

please andwer requirement 1,2 and 3.

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?

Answer 1

1)

Calculation of Variable cost per unit.

For producing 3,500 Garments the total variable cost is $2,625. So per unit variable cost will be:-

$2,625/3,500

= .75 Per Garments.

Variable cost per unit doesn't change as the production increase or decrease.

Calculation of Total Fixed Cost

For producing 3,500 units of Garments it takes $2/Garments to fixed cost. So the total fixed cost will be:-

3,500*$2

= $7,000

Fixed cost in total remains constant as the production increase or decrease (up to a relevant range)

	2,000 Garments	3,500 Garments	5,000 Garments
Total Variable Cost	$.75*2,000 =$1,500	$2,625	$.75*5,000 =$3,750
Total Fixed Cost	$7,000	$7,000	$7,000
Total Operating Cost	$8,500	$9,625	$10,750
Variable Cost per Garment	$.75	$.75	$.75
Fixed Cost per Garment	$3.5	$2	$1.4
Average Cost per Garment	$4.25	$2.75	$2.15

2)

The average cost per Garment changes because as the production increases total fixed cost is remained constant. Total fixed cost will not increase as the production increase.

3)

If Owner uses average cost per unit at full capacity to predict total cost of 2,000 garments then,

Predicted cost will be 2000*$2.15

= $4,300

Total cost for producing 2,000 garments is $8,500 (As calculated earlier).

He underestimated the total cost by $8,500-$4,300 = $4,200