The St. Thomas Winery plans to open a new production facility in the Napa Valley

Question

The St. Thomas Winery plans to open a new production facility in the Napa Valley of California. Based on information provided by the accounting department, the company estimates fixed costs of $250,000 per year and average variable costs of
AVC = $10 + $0.01Q Where AVC is average variable cost (in dollars) and Q is output measured in cases of out per year.

Question:

An increase in worker productivity because of greater experience or learning during the course of the year resulted in a substantial cost savings for the company.
Estimate the effect of learning on average total cost if actual total cost was $522,500 at an actual volume of 5,000 cases.

Thanks much,

Mike

Explanation / Answer

Let's estimate total costs TC = FC + VC VC = AVC*Q TC = FC + AVC*Q TC = 250000 + (10 + 0.01*5000)*5000 TC = 550000 But the actual TC was 522500. So, learning saved us: 550000 - 522500 = 27500

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