Currently, it costs $1.50 / unit to produce a product. A machine can be purchased for...
- Currently, it costs $1.50 / unit to produce a product. A machine can be purchased for $15000 to reduce the cost to $0.40 / unit. Assume the machine has no salvage value. Also, for this problem, ignore the time value of money.
- What is the breakeven production rate?
- What is the average cost per unit if 500 units are produced with the machine?
- What is the marginal cost with the machine?
Homework Answers
A. The machine can reduce the per unit cost by $1.50 - $0.40 = $1.10. So, the breakeven production amount = $15000/$1.10 = 13,636 units (approx.)
B. Total fixed costs = $15,000.
Total variable costs = $0.40 * 500 = $200
Total costs = total fixed costs + total variable costs = $15,000 + $200 = $15,200.
So, average cost = total cost/units = $15,200/500 = $30.40
C. Marginal cost is the additional cost of producing an extra unit. Here, in order to produce one more unit, only $0.40 is incurred. So, $0.40 is the marginal cost.
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