Problem 10-3 Average Cost (LO2) In a slow year, Deutsche Burgers will produce 3

Question

Problem 10-3 Average Cost (LO2)

In a slow year, Deutsche Burgers will produce 3 million hamburgers at a total cost of $3.9 million. In a good year, it can produce 6 million hamburgers at a total cost of $5.4 million.

What is the average cost per burger when the firm produces 1.5 million hamburgers? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

What is average cost when the firm produces 3 million hamburgers? (Round your answer to 2 decimal places.)

In a slow year, Deutsche Burgers will produce 3 million hamburgers at a total cost of $3.9 million. In a good year, it can produce 6 million hamburgers at a total cost of $5.4 million.

Explanation / Answer

Let fixed cost be x and variable be y

x + 3000000y = 3900000

x + 6000000y = 5400000

3000000y = 1500000

y = 0.5

x = 2.4 million

Hence fixed cost is 2.4 million and variale cost is $0.5

a)

for producing 1.5million burgers cost is 2.4m + 1.5 * 0.5 = 3.15m

average cost is 3.15 / 1.5 = $2.1 per buger

b) for 3 million burgers average cost is 3.9 / 3 = $1.3 per burger

c) The fixed costs are spread across more burgers

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