Question

The RideEm Bicycles factory can produce 170 bicycles in a day at a total cost of $10,900. It can produce 190 bicycles in a day at a total cost of $11,600. What are the company's daily fixed costs?

Answer 1

If we assume that when producing 190 bicycles vs 170 bicycles the difference in total daily cost is purely attributed to the extra 20 bicycles, THEN the cost to produce 20 bicycles (190 - 170) = 11600 - 10900 = 700

So the cost per bicycle is 700/20 = 35/bike

Now we can subtract the cost of bicycle production to determine the daily fixed cost that is not related to the number of bicycles.

i.e. 170 bicycles x 35 = 5950

So on a day that RideEm produces 170 bicycles, subtract 5950 from total day cost of 10900, which equals 4950.

So the fixed daily costs are $4950, and on top of this, the company pays 35/bike to produce.