Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 48

Interpreting Average Cost

Concern for gas emissions and depletion of nonrenewable resources has caused environmentalists and others to push for higher fuel-efficiency standards for new cars. The current Corporate Automotive Fuel Efficiency (CAFE) standards require automakers to produce an overall fuel efficiency of 26.2 miles per gallon for all autos produced. Currently the U.S. government supports the development of hybrid autos that combine gas and electric power as the solution to the problem. Others propose simply raising the CAFE standards for auto manufacturers. To study the issue, the American Council for an Energy-Efficient Economy (ACEEE) conducted research to determine the cost for raising fuel efficiency for the different proposals. Their findings are as follows:

Option to reduce emissions and provide better fuel economy	Fuel Efficiency (mpg)	Cost for each Gallon of Gas Saved
Current mileage standards	26.2	—
Moderate increase in CAFE	40.8	$0.57
Significant increase in CAFE	45.8	$0.60
Partial hybrid (15% of power from electricity)	52.6	$1.38
Full hybrid (40% of power from electricity)	59.3	$1.80

The increase in fuel economy required by higher CAFE standards would require automakers to use conventional technology to improve engines and transmissions. The hybrid vehicles require newer technology and electric motors.

Required Give a brief critical review of the ACEEE’s research results. What questions would you have for the researchers who presented these results?

Step 1 of 2

Fixed costs are those costs which does not changes with change in level of production. Variable costs are those costs which changes with change in level of production. The sum of fixed and variable costs is total cost for the company. Average cost is total cost divided by units produced.