A machine that is used in an industrial process to make a certain product has an

Question

A machine that is used in an industrial process to make a certain product has an initial cost of $50,000 and it is expected to have a zero salvage value. The maximum capacity of this machine is 7,000 units per year, and its life is estimated to be 4 years. The unit variable cost (raw material, energy, etc.) is $12.40, the total fixed annual cost of supervision and taxes is $20,000. The company uses 15% interest compounded annually. If the machine operates at 50 percent maximum capacity: Calculate the average unit cost and annual total cost Calculate the incremental production cost.

Explanation / Answer

Initial Cost is $50,000

Salvage Value=0

Capacity of the machine 7000 Units in a Year

Life of the machine-4 Years

Unit variable cost is $12.40

Annual cost of Supervison and Taxes is $20,000.

Annual Interest-15% Compounded annually. if the machine operates at 50% maximum Capacity

Incremental production cost is the increase in total cost resulting from the increase in production

Average Unit Cost= Total Cost/Number of goods produced AC=TC/Q

Average Unit cost=$50000/7000=7.14 per unit Average Cost.

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