Mountain Manufacturing is trying to predict the cost associated with producing its hiking packs. At a production level of 20,000 packs, Mountain Manufacturing's average cost per pack is $70.00.
-At Mountain Manufacturing if $200,000 of the costs are fixed, and the plant manager uses the average cost per unit to predict total costs, her forecast for 25,000 packs will be
A) $1,750,000.
B) $1,550,000.
C) $1,400,000.
D) $700,000.

Question

Quizplus · Accepted Answer

At 20,000 packs, the average cost is $70.00 per pack, which includes both fixed and variable costs. The total cost at this production level is 20,000 packs * $70.00/pack = $1,400,000. Given that $200,000 of this is fixed cost, the variable cost is $1,400,000 - $200,000 = $1,200,000. The variable cost per pack is therefore $1,200,000 / 20,000 packs = $60.00. For 25,000 packs, the total variable cost is 25,000 packs * $60.00/pack = $1,500,000. Adding the fixed cost of $200,000, the total forecasted cost for 25,000 packs is $1,500,000 + $200,000 = $1,700,000. However, the correct calculation based on the average cost method (which was the method asked about but not correctly applied in the explanation) would actually involve using the average cost per unit to predict total costs directly, leading to the correct choice being A) $1,750,000, as it reflects an incorrect application of the method described. The correct approach using the average cost directly would involve multiplying the new quantity of packs (25,000) by the average cost per pack ($70.00), which indeed results in $1,750,000.

Mountain Manufacturing Is Trying to Predict the Cost Associated with Producing