Question

Chloe’s Cafe bakes croissants that it sells to local restaurants and grocery stores. The average costs to bake the croissants are $0.30 for 3,100 and $0.25 for 6,200. Required: If the total cost function for croissants is linear, what will be the average cost to bake 5,400? (Do not round intermediate calculations. Round your final answer to 4 decimal places.)

Average Cost =

Answer 1

• Working

>Total cost for 3100 units = 3100 x $ 0.30 = $ 930

>Total cost for 6200 units = 6200 x $ 0.25 = $ 1,550

Using High Low Method to classify Variable and Fixed components

	Units	Cost
High Level	6,200	$                     1,550.00
Low Level	3,100	$                         930.00
Difference	3,100	$                         620.00

A	Difference in Cost	$                         620.00
B	Difference in units	3,100
C = A/B	Variable cost per unit	$                             0.20

Working		High Level	Low Level
A	Total Cost	$                   1,550.00	$                         930.00
B	Total Units	6200	3100
C	Variable cost per unit	$                           0.20	$                             0.20
D = B x C	Total Variable cost	$                   1,240.00	$                         620.00
E = A - D	Total Fixed Cost	$                       310.00	$                         310.00

• Requirement: Average Cost to make 5400 units

Total Cost for 5400 units = $ 310 Fixed Cost + ($0.20 x 5400) Variable cost
= 310 + 1080
= $ 1,390

Average Cost = $ 1390 / 5400 units = $ 0.2574

• Correct Answer = $ 0.2574