Question

Perreth Drycleaners has capacity to clean up to 7,500 garments per month.

Requirements

1.	Complete the schedule below for the three volumes shown.
2.	Why does the average cost per garment​ change?
3.	Suppose the​ owner, Dennis Perreth​, erroneously uses the average cost per unit at full capacity to predict total costs at a volume of 4,500 garments. Would he overestimate or underestimate his total​ costs? By how​ much?

Requirement 1. Complete the following schedule for the three volumes shown. ​(Round all unit costs to the nearest cent and all total costs to the nearest whole​ dollar.)

	4,500	6,000	7,500
	Garments	Garments	Garments
Total variable costs		$3,000
Total fixed costs
Total operating costs
Variable cost per garment
Fixed cost per garment		$1.80
Average cost per garment

Answer 1

1
	4500	6000	7500
	Garments	Garments	Garments
Total Variable Costs	2250	3000	3750
Total Fixed Costs	10800	10800	10800
Total Operating Costs	13050	13800	14550
Variable Cost per Garment	0.50	0.50	0.50
Fixed Cost per Garment	2.40	1.80	1.44
Average Cost per Garment	2.90	2.30	1.94

2
The average cost per garment changes as volume changes, due to the fixed component of the dry cleaner's costs. The fixed cost per unit decreases as volume increases , while the variable cost per unit remains constant

3
Costs at 4500 garments	13050	=10800+(4500*0.5)
Costs wrongly predicted	8730	=4500*1.94
Underestimated costs	4320	=13050-8730
He would underestimate his costs by $ 4320