In a slow year, Deutsche Burgers will produce 2.4 million hamburgers at a total
ID: 2765095 • Letter: I
Question
In a slow year, Deutsche Burgers will produce 2.4 million hamburgers at a total cost of $3.9 million. In a good year, it can produce 4.2 million hamburgers at a total cost of $4.8 million. What are the fixed costs of hamburger production? (Do not round intermediate calculations. Enter your answer In millions rounded to 1 decimal place.) h. Who! is Iho variable cost per hamburger? (Do not round Intermediate calculation. Enter you answer in millions rounded to 1 decimal place.) What is the variable cost per hamburger? (Do not round intermediate calculations. Round your answer to 2 decimal places.) What it the average cost per burger when the firm produces 1 million hamburgers? (Do not round intermediate calculations Round your answer to 2 decimal places) What is the average cost per burger when the firm produces 2 million hamburgers? (Do not round intermediate calculations, Round your answer to 2 decimal places.) Why is the average cost lower when more burgers are produced? The fixed costs are spread across more burgers. Fixed costs are constant per burger. Variable costs are lower per burger.Explanation / Answer
Let the fixed cost be X and Variable cost be Y So, we can have two equations for two levels of production as follows: Total Cost=Fixed Cost+Quantity * Variable Cost X+2400000*Y=3900000 when 2.4 million items are produced (A) X+4200000*Y=4800000 when 4.8 million items are produced (B) If we subtract (A) from (B) , we get 4200000Y-2400000Y=4800000-300000 1800000Y=900000 ot Y=900000/1800000=0.5 From (A) , X=3900000-2400000Y or X=3900000-2400000*0.5=2700000 (a)Fixed Cost=$2700000 (b)Variable Cost per Hamburger=$0.5 ©When 1m hamburger is produced , contribution from Fixed Cost=2700000/1000000=2.7 So Average Cost=Contribution from FC+Variable Cost=2.7+0.5=3.2 (d)When 2m hamburger is produced, contribution from Fixed cost=2700000/2000000=1.35 So Average Cost=Contribution from FC+Variable Cost=1.35+0.5=1.85 (e)When more items are produced , the Fixed cost gets distributed over large number and hence the average cost declines.