Question

For Questions 22 and 23: A company's variable cost of producing special sensors varies according to the production level per year. The variable cost is SR 500 per sensor from 0 to 500 sensors. Above this level, the variable cost is different. At this time, the company is producing 500 sensors per year, and the average cost per sensor is SR 1,000. Next year, it expects to produce 1,000 sensors, and the projected average cost for all 1,000 sensors will be SR 1,500 per sensor.

22. What is the current fixed cost? (unit: SR)
    a) 200,000 b) 150,000 c) 300,000 d) 250,000

23. If the fixed cost and variable cost rates hold constant next year, the average cost of the 800 sensor production is closet to which of the following? (unit: SR)

    a) 1,563 b) 1,538 c) 1,575 d) 1,550

Answer 1

(1) Till the level of 500 sensors, variable cost is SR 500 per sensor.

Thus, total variable cost at this output level = 500*500 = SR 250000.

Average cost = total cost/units produced

Thus, total cost = average cost*units produced

Total cost = 1000*500 = SR 500000

Total cost = total fixed cost + total variable cost

Total fixed cost = total cost - total variable cost

Thus, current fixed cost = 500000 - 250000 = SR 250000

So, the correct option is d) 250000.

(2) With production of 1000 sensors, since projected average cost is SR 1500 per sensor,
Total cost = 1500*1000 = 1500000

With fixed cost constant in next year,
Total variable cost = 1500000 - 250000 = 1250000.

Till 500 sensors, we know that total variable cost is 250000,
Thus remaining variable cost of (1250000 - 250000 = 1000000) must be divided through quantity exceeding 500 sensors that is, (1000 - 500 =) 500 sensors.
Thus, for sensors more than 500,
Variable cost per sensor = 1000000/500 = SR 2000

Thus, for 800 sensors,
Total variable cost = 500*500 + (800 - 500)*2000
= 250000 + 600000
= 850000

Total cost = total variable cost + total fixed cost
TC = 850000 + 250000
= SR 1100000

Average total cost for 800 sensors
= 1100000/800
= SR 1375 which is closest to 1538.

Thus, correct option is b)1538.