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Homework answers / question archive / In a slow year, Deutsche Burgers will produce 1 million hamburgers at a total cost of $3
In a slow year, Deutsche Burgers will produce 1 million hamburgers at a total cost of $3.2 million. In a good year, it can produce 2 million hamburgers at a total cost of $3.4 million.
a. What is the average cost per burger when the firm produces 0.5 million hamburgers? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
b. What is average cost when the firm produces 1 million hamburgers? (Round your answer to 2 decimal places.)
c. Why is average cost lower when more burgers are produced?
aa. The fixed costs are spread across more burgers.
bb. The fixed costs are spread across less burgers.
cc. Fixed costs are constant per burger.
dd. Variable costs are lower per burger.
Question a)
Let us first find out the total fixed cost and variable cost per unit.
Variable cost per unit
= Difference in Total cost / Difference in produced units
= ($3,400,000.00 - $3,200,000.00) / (2,000,000 - 1,000,000)
= $0.20
Fixed cost
= Total cost of 1 million units - Variable cost
= $3,200,000.00 - (1,000,000 x 0.20)
= $3,000,000.00
So,
Total cost of 0.5 million hamburgers
= Fixed cost + Variable cost
= $3,000,000.00 + (500,000 x 0.20)
= $3,100,000.00
Average cost
= Total cost / Number of units
= 3,100,000 / 500,000
= $6.20
Question b)
Average cost of 1 million hamburgers
= 3,200,000 / 1,000,000
= $3.20
Question c)
The average cost reduces more the production occurs because the fixed cost is generally the same at all levels of production. Since the fixed costs are the same more the units produced more the ficed costs gets divided into reducing the average fixed cost per unit ultimately resulting in reduction in average cost.
