Question

In a slow year, Deutsche Burgers will produce 3.5 million hamburgers at a total cost of $5.1 million. In a good year, it can produce 6.5 million hamburgers at a total cost of $6 million.

a. What are the fixed costs of hamburger production? (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places.)

b. What is the variable cost per hamburger? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

c. What is the average cost per burger when the firm produces 1 million hamburgers? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

d. What is the average cost per burger when the firm produces 2 million hamburgers? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

e. Why is the average cost lower when more burgers are produced?

Answer 1

Variable cost per hamburger = Difference in cost/Difference in Units

= (6,000,000 - 5,100,000)/(6,500,000-3,500,000)

= $0.3 per unit

Fixed costs = Total costs - variable costs

= 5,100,000 - 3,500,000*0.3

= $4,050,000

b.Variable cost per hamburger =$0.3

c.Average cost = 0.3 + 4,050,000/1,000,000

= $4.35

d.Average cost = 0.3 + 4,050,000/2,000,000

= $2.325

e.Average cost is lower since fixed cost remains constant and hence, average fixed cost will be lower when more units are produced