The following production and average cost data for two levels of monthly production volume have been supplied by a company that produces a single product:
-The best estimate of the total cost to manufacture 3,200 units is closest to:
A) $675,840
B) $616,640
C) $661,040
D) $646,240

Question

The following production and average cost data for two levels of monthly production volume have been supplied by a company that produces a single product: 
-The best estimate of the total cost to manufacture 3,200 units is closest to:
A) $675,840 
B) $616,640 
C) $661,040 
D) $646,240

Quizplus · Accepted Answer

To estimate the cost of manufacturing 3,200 units, we need to first determine the cost function based on the provided data:

For the low production level of 2,000 units per month:
Total Cost = Fixed Cost + Variable Cost * Quantity
85,000 = Fixed Cost + 18Q
85,000 = Fixed Cost + 18(2,000)
Fixed Cost = 49,000
Variable Cost = 18

For the high production level of 3,000 units per month:
Total Cost = Fixed Cost + Variable Cost * Quantity
125,000 = Fixed Cost + 16Q
125,000 = Fixed Cost + 16(3,000)
Fixed Cost = 77,000
Variable Cost = 16

Now that we have the cost function, we can estimate the total cost for producing 3,200 units:
Total Cost = Fixed Cost + Variable Cost * Quantity
Total Cost = 77,000 + 16(3,200)
Total Cost = 77,000 + 51,200
Total Cost = 128,200

Therefore, the best estimate of the total cost to manufacture 3,200 units is closest to $661,040, which is option C.

The Following Production and Average Cost Data for Two Levels