Question

Pierce Drycleaners has capacity to clean up to 7.500 garments per month. Requirements 1. Complete the schedule below for t three volumes shown. 2. Why does the average cost per garment change? 3. Suppose the owner, Damien Pierce, erroneously uses the average cost per unit at full capacity to predict total costs at a volume of 4,500 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.) 4,500 6,000 7,500 Garments Garments Garments Total variable costs 5.100 Total fixed costs Total operating costs Variable cost per garment 2.10 Fixed cost per garment Average cost per garment Requirement 2. Why does the average cost per garment change? The average cost per garment changes as volume changes, due to the component of the dry cleaner's costs. The M cost per unit decreases as volume while the variable cost per unit Requirement 3. Suppose the owner, Damien Pierce, erroneously uses the average cost per unit at full capacity to predict total costs at a volume of 4,500 garments. Would he overestimate or underestimate his total costs? By how much? He would his costs by

Answer 1

1.

	4,500	6,000	7,500
Total variable costs	$3,825	$5,100	$6,375
Total fixed costs	$12,600	$12,600	$12,600
Total operating costs	$16,425	$17,700	$18,975
Variable cost per garment	$0.85	$0.85	$0.85
Fixed cost per garment	$2.80	$2.10	$1.68
Average cost per garment	$3.65	$2.95	$2.53

2.

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

3.

Actual cost at 4,500 = $16,425

Cost as per average cost at full capacity = 4,500 X $2.53 = $11,385

He would underestimate his cost by $5,040 (ie. $16,425 - $11,385)