Suppose that Roots' marginal cost of a jacket is a constant $100, and the total fixed costs at one of its stores is $2,000 a day

Average total cost:

Before advertising: $233.33 per jacket

After advertising: $188.89 per jacket

With the store selling 15 jackets per day, its total costs are its fixed costs + its variable costs. We know:

• Fixed costs = $2,000
• Variable costs per unit = $100

With 15 jackets sold each day, variable costs are $1,500 (15 jackets x $100 per jacket). Adding in fixed costs, the store incurs total costs of $3,500 per day. If we allocate these total costs to the product line, we get an average cost of $3,500 / 15 = $233.33 per jacket.

The addition of the advertising increases costs and jacket sales. Now we know:

• Fixed costs = $4,000
• Variable costs per unit = $100
• Total variable costs = 45 jackets x $100 per jacket = $4,500.

Total store costs are now $8,500 per day. If we allocate these costs over the 45 jackets, we get an average unit cost of $188,89 per jacket.