Question

Fixed and Variable Costs. In a slow year, Deutsche Burgers will produce 2 million hamburgers at a total cost of $3.5 million. In a good year, it can produce 4 million hamburgers at a total cost of $4.5 million. a. What are the fixed costs of hamburger production? b. What are the variable costs? c. What is the average cost per burger when the firm produces 1 million hamburgers? d. What is the average cost when the firm produces 2 million hamburgers? e. Why is the average cost lower when more burgers are produced?

Answer 1

Answer:

variable Cost = $0.5 per burger

Fixed Cost = $2,500,000

Average Cost per burger is  $3/unit

Average Cost per burger is $1.75/unit

and

the fixed cost is spread across more burger so that average cost fall

Explanation:

given data

2 million hamburgers total cost = $3.5 million

4 million hamburgers total cost = $4.5 million

solution

we know here that total cost by linear equation is

Total Cost = Total variable Cost + Total Fixed Cost   ....................1

and

Total variable Cost = Number of Units × variable Cost per unit

and

we can write according to question  

3,500,000 = 2,000,000 variable Cost +  Fixed Cost     ..............3

4,500,000 = 4,000,000 variable Cost +  Fixed Cost     ..............4

now subtract equation 3 by 4

we get

1,000,000 = 2,000,000 variable Cost

so variable Cost = $0.5 per burger

and now put this in equation 3

3,500,000 = 2,000,000 × 0.5 +  Fixed Cost

Fixed Cost = $2,500,000

and

Average Cost per burger is  =  $\frac{total cost}{no of burger}$

Average Cost per burger is  =  $\frac{1,000,000*0.5 + 2,500,000}{1,000,000}$

Average Cost per burger is  $3/unit

and

Average Cost per burger is = $\frac{total cost}{no of burger}$

Average Cost per burger = $\frac{2,000,000*0.5 + 2,500,000}{2,000,000}$

Average Cost per burger is $1.75/unit

and

the fixed cost is spread across more burger so that average cost fall