Table 1 records the costs of a workshop producing insulated lunch containers during 2022. The owner is considering expanding output despite increased materi...
Question 1 Report
Table 1 records the costs of a workshop producing insulated lunch containers during 2022. The owner is considering expanding output despite increased material prices and inflation in the economy.
| Output (containers per week) | Total cost ($) |
|---|---|
| 0 | 640 |
| 80 | 1280 |
| 160 | 1920 |
| 240 | 2720 |
Table 1
(a) Calculate the total variable cost when output is 80 containers per week. [2]
(b) Calculate the average cost when output is 160 containers per week. [2]
(c) Explain how a decrease in the price of a raw material could affect the firm's costs. [2]
Answer Details
(a) At zero output, total cost is \(\$640\), so this is fixed cost. Total variable cost is total cost minus fixed cost:
\[\$1280-\$640=\$640\]
Total variable cost at 80 containers is \$640. [2]
(b) Average cost is total cost divided by output:
\[\frac{\$1920}{160}=\$12\text{ per container}\]
The average cost is \$12 per container. [2]
(c) A lower raw-material price reduces the firm’s variable costs. [1] Therefore total cost, and possibly average cost, decreases at each level of output. [1] Raw materials are variable costs because more are normally needed when more containers are produced.
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