Question

Chloe’s Cafe bakes croissants that it sells to local restaurants and grocery stores. The average costs to bake the croissants are $0.55 for 2,500 and $0.50 for 5,000.

Required:

If the total cost function for croissants is linear, what will be the average cost to bake 4,200? (Do not round intermediate calculations. Round your final answer to 4 decimal places.)

Answer 1

Number of units	2,500	5,000
Average cost per unit	$0.55	$0.50
Total cost	$1,375	$2,500

Variable cost per unit = Change in cost/Change in units

= (2,500 - 1,375)/(5,000 - 2,500)

= 1,125/2,500

= $0.45

Fixed cost = Highest activity Cost - (Variable cost per unit x Highest activity unit)

= 2,500 - (0.45 x 5,000)

= 2,500 - 2,250

= $250

Total cost to bake 4,200 = Fixed cost + (Variable cost per unit x 4,200)

= 250 + (0.45 x 4,200)

= 250 + 1,890

= $2,140

Average cost to bake 4,200 = Total cost /4,200

= 2,140/4,200

= $0.5095