Requirement 1:
Particulars | 2,000 Garments | 3,500 Garments | 5,000 Garments |
Total Variable costs | $1,500 | $2,625 | $3,750 |
Total Fixed costs | $7,700 | $7,700 | $7,700 |
Total Operating Costs | $9,200 | $10,325 | $11,450 |
Variable cost per unit | $0.75 | $0.75 | $0.75 |
Fixed cost per unit | $3.85 | $2.20 | $1.54 |
Average cost per garment | $4.60 | $2.95 | $2.29 |
Working Notes:
Variable cost per unit:
Variable cost per unit = $2,625 / 3,500 garments = $0.75 per garment
Variable cost:
For 2,000 garments = 2,000 garments * $0.75 per garment = $1,500
For 5,000 garments = 5,000 garments * $0.75 per garment = $3,750
Fixed cost:
Fixed cost is constant in amount and changes in per unit. Fixed cost per unit = $2.20 per unit
Therefore, fixed cost = 3,500 garments * $2.20 per garment = $7,700
Fixed cost per unit:
For 2,000 garments = $7,700 / 2,000 garments = $3.85 per garment
For 5,000 garments = $7,700 / 5,000 garments = $1.54 per garment
Average cost per unit
Average cost per unit = Total operating cost / Units
For 2,000 garments = $9,200 / 2,000 garments = $4.60 per garment
For 2,000 garments = $10,325 / 3,500 garments = $2.95 per garment
For 5,000 garments = $11,450 / 5,000 garments = $2.29 per garment
Requirement 2:
The average cost per garment changes as the volume changes, due to the fixed cost component of the dry cleaners cost. The fixed cost per unit decreases as volume increases while the variable cost per unit remains the same.
Requirement 3:
Total operating cost of 2,000 garments = $9,200
Average cost per unit at full capacity (5,000 garments) = $2.29
Total cost of 2,000 garments at full capacity = 2,000 garments * $2.29 per garment = $4,580
Cost is underestimated by $4,620 ($9,200 - $4,580)
Underestimate cost by $4,620 |
All the best...
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