Question

The table shows the marginal cost for a company's product at various production levels.

Units	Marginal cost ($/unit)		Units	Marginal cost ($/unit)
0	3.21		7000	2.17
1000	2.87		8000	2.16
2000	2.78		9000	2.18
3000	2.72		10,000	2.22
4000	2.58		11,000	2.31
5000	2.45		12,000	2.64
6000	2.25		13,000	2.84

(a) Estimate the cost (not including fixed costs) to produce the first 12,000 units by considering batches of 2000 units. Use the initial marginal cost for each batch in your calculations.

$  

(b) Use batches of 1000 units and the ending marginal cost for each batch to estimate the cost of raising the production level from 4000 to 11,000 units.

$

Answer 1

(a) So, we need to take the initial marginal cost, that will be the cost of 0 units, 2000 units, 4000 units, 6000 units, 8000 units and 10000 units.

Cost = Number of units in each batch * (Marginal cost of 0 units + Marginal cost of 2000 units + Marginal cost of 4000 units + Marginal cost of 6000 + Marginal cost of 8000 units + Marginal cost of 1000 units)

Cost = 2000 * ($3.21 + $2.78 + $2.58 + $2.25 + $2.16 + $2.22) = $30400

(b)

Now, we need to use the batches of 1000 units and the ending marginal cost

So, for the 4000-5000 bracket, we will be taking the marginal cost of 5000 units

Cost = 1000 * ($2.45 + $2.25 + $2.17 + $2.16 + $2.18 + $2.22 + $2.31) = $15740

Note - Post any doubts/queries in comments section for any additional help.