Question

Pierce Dry Cleaners has capacity to clean up to 9,000 garments per month. Requirements 1. Complete the following schedule for the three volumes shown. 2. Why does the average cost per garment change? 3. Suppose the owner, Dan Pierce, erroneously uses the average cost per unit at full capacity to predict total costs at a volume of 6,000 garments. Would he overestimate or underestimate his total costs? By how much? Requirement 1. Complete the schedule below for the three volumes shown. (Round all unit costs to the nearest cent and all total costs to the nearest whole dollar.) 6,000 9,000 7,500 Garments Garments Garments 6.375 Total variable costs Total fixed costs Total operating costs Variable cost per garment Fixed cost per garment $ 2.40 Enter any number in the edit fields and then click Check Answer.

Answer 1

Answer 1.

PARTICULARS	6000 GARMENTS	7500 GARMENTS	9000 GARMENTS
Total Variable Cost	5100 (6000 x 0.85)	6375 (7500 x 0.85)	7650 (9000 x 0.85)
Total Fixed Cost	18000	18000	18000
Total operating Cost	23100	24375	25650
Variable Cost per Garment	0.85	0.85	0.85
Fixed Cost Per garment	3 (18000 / 6000)	2.40 (18000 / 7500)	2 (18000 / 9000)
Average cost per Garment	3.85	3.25	2.85

Note : i.) fixed cost is always same no matter what is production level. so we have given fixed cost per unit at level 7500 garment is 2.4 by using this we found fixed cost = 7500 x 2.4 = 18000

ii.) total variable cost (at 7500 garment ) = 6375

variable cost per unit = total variable cost / no. of unit

Variable cost per unit = 6375 / 7500

  Variable cost per unit = 0.85 and its always same in every level but total variable cost is increase by increase in production.

Answer 2. average cost per garment  is always change because in average cost have both the component of fixed cost and variable cost where variable cost per unit is always same but fixed cost per unit is always different due to change in fixed cost per unit result in change in average cost.

Answer 3. Average cost per garment at full capacity (9000 garment) = 2.85

Dan pierce erroneously use above avg. cost per garment to predict total cost at 6000 garment

Total Cost calculate by Dan Pierce = 6000 x 2.85

Total Cost calculate by Dan Pierce = 17100

But As per Answer 1. Total Cost at 6000 garment = 23100

He Understimate the total cost by $ 6000 (23100 - 17100)