ABC Company is a producer of electronic furnace air filters. A significant jump
ID: 2532984 • Letter: A
Question
ABC Company is a producer of electronic furnace air filters. A significant jump in new housing starts in the region has triggered a 25 percent increase in orders for the filter units, especially the quality model that ABC sells for $270. Six weeks after increasing production to supply the increased orders, the production intern questions you about the following cost data:
Filter
This Month
Last Month
Change
Average total cost per unit
$167.20
$171.14
-$3.96
Cost of last unit produced (i.e., marginal cost)
$104.90
$101.22
+$3.68
In the simplest terms possible and using what you have learned about cost behavior, provide a plausible explanation of how this might occur.
Filter
This Month
Last Month
Change
Average total cost per unit
$167.20
$171.14
-$3.96
Cost of last unit produced (i.e., marginal cost)
$104.90
$101.22
+$3.68
Explanation / Answer
Ans:
Average total cost per unit= Total cost (including Fixed cost)/Number of units produced
Margin cost = change in total cost (variable costs)/change in number of units produced (additional unit produced)
Explanations:
Average total cost per unit has decline from last month to this month ($171.14 to $167.20).This is due to increase in number of units produced. Fixed cost remains the same.
Marginal cost of last unit produced has increased from last month to this month ($101.22 to $104.90).this is due to increase in variable cost per unit this month.