Question

Diane's Donuts will begin selling donuts next week. Diane figures that the average variable cost to make each donut will be constant at $0.30. She has already paid $20,000 for the donut-making machinery and one year's rent.
Refer to Situation. What will Diane's approximate average fixed costs be if she sells 36,500 donuts in one year?

A. $0.088
B. $0.30
C. $0.138
D. $0.55

Answer 1

Answer:

Option (d) is correct.

Explanation:

Given that,

Average variable cost = $0.30 for each donut

Fixed cost: Cost of rent and machinery = $20,000

If the number of donuts produced and sold in one year is 36,500, then

Average fixed cost:

= Total fixed cost ÷ Number of units sold

= $20,000 ÷ 36,500

= $0.547 or $0.55

Therefore, the average fixed costs be $0.55 if she sells 36,500 donuts in one year.