In a slow year, Deutsche Burgers will produce 3.500 million hamburgers at a tota
ID: 2789473 • Letter: I
Question
In a slow year, Deutsche Burgers will produce 3.500 million hamburgers at a total cost of $5.100 million. In a good year, it can produce 6.500 million hamburgers at a total cost of $6.000 million.
a. What are the fixed costs of hamburger production? (Do not round intermediate calculations. Enter your answer in millions rounded to 1 decimal place.)
b. What is the variable cost per hamburger? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
c. What is the average cost per burger when the firm produces 1 million hamburgers? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
d. 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.)
e. Why is the average cost lower when more burgers are produced?
The fixed costs are spread across more burgers.
Variable costs are lower per burger.
Fixed costs are constant per burger.
Explanation / Answer
a) The fixed costs will remain irrespective of the no. of burgers produced. Therefore, cost of additional burgers will only include the variable cost.
Additional burgers produced = 6,500,000 - 3,500,000 = 3,000,000
Additional cost incurred = $6,000,000 - $5,100,000 = $900,000
Variable cost per burger = Additional Cost / Additional burgers = $900,000 / 3,000,000 = $0.3 per burger
Now, we take any total cost minus variable cost whether at 3.5m burgers or 6.5m burgers and compute the fixed cost -
Fixed Cost = Total Cost - variable cost = $5,100,000 - $0.3 per burger x 3,500,000 burgers = $4,050,000
It will be the same even at 6.5m burgers -
Fixed Cost = $6,000,000 - $0.3 per burger x 6,500,000 burgers = $4,050,000
b) Variable cost per burger = $0.3 (computed above)
c) Average Cost (AC) per burger = (Variable Cost + Fixed Cost) / No. of Burgers
AC at 1 million burgers = ($0.3 x 1,000,000 + $4,050,000) / 1,000,000 = $4.35 per burger
d) AC at 2 million burgers = ($0.3 x 2,000,000 + $4,050,000) / 2,000,000 = $2.325 per burger
e) Average cost is lower when more burgers are produced because the fixed cost are spread across more burgers. (Since they are constant, they don't change with no. of burgers).