Question

This month your vendor invoiced $31,500 in testing charges for your production run. The unit cost for testing is twice as much for each of the first 400 units per month as compared to each unit over 400. If we shipped 500 units to the vendor this month, find: a) Average cost per unit b) Cost per unit below the price break point c) Marginal cost for the 650th unit

Answer 1

Answer:

a) Average Cost per unit = $63 / unit

b) Cost per unit below break point = $ 70 / unit

c) Marginal Cost for 650th Unit = $35 / unit

Explanation:

a) To calculate average cost per unit, we simply divide the total cost for the month $31500 by the total units shipped this month 500 units.

Average cost p.u = 31500 / 500 = $63 / unit

b) The breaking point is at 400 units. The cost for initial 400 units is twice that of the additional units after 400. So, we can say that in this case of 500 units, it takes 2x cost to test initial 400 units while x to test the later 100 units.

Thus,

• 31500 = 400 * 2x + 100 * x

• 31500 = 800x + 100x

• x = 31500 / 900

• x = 35

So, plugging 35 in place of x,

the cost per unit below cost break = 2 * 35 = $70 / unit

c) Marginal cost of 650th unit is simply x that is $35 / unit