Question

2. Computing Average Cost [LO3] K-Too Everwear Corporation can manufacture mountain climbing shoes for $33.18 per pair in variable raw material costs and $24.36 per pair in variable labor expense. The shoes sell for $170 per pair. Last year, production was 145,000 pairs. Fixed costs were $1,750,000.

a. What were the total production costs?

b. What is the marginal cost per pair?

c. What is the average cost?

d. If the company is considering a one-time order for an extra 5,000 pairs, what is the minimum acceptable total revenue from the order? Explain.

Answer 1

Answer a.

Variable Cost per pair = Variable Raw Material Cost + Variable Labor Expense
Variable Cost per pair = $33.18 + $24.36
Variable Cost per pair = $57.54

Total Production Cost = Variable Cost per pair * Number of units produced + Fixed Costs
Total Production Cost = $57.54 * 145,000 + $1,750,000
Total Production Cost = $10,093,300

Answer b.

Marginal Cost per pair = Variable Cost per pair
Marginal Cost per pair = $57.54

Answer c.

Average Cost = Total Production Cost / Number of units produced
Average Cost = $10,093,300 / 145,000
Average Cost = $69.61

Answer d.

Production Cost of additional 5,000 pairs = Variable Cost per pair * Number of additional pairs produced
Production Cost of additional 5,000 pairs = $57.54 * 5,000
Production Cost of additional 5,000 pairs = $287,700

Minimum acceptable total revenue is $287,700

So, company should produce additional units if it is able to recover its cost of production.