Question

You are given the following total costs for a production facility for scales that can also measure body fat percentage:

Number of units Produced ('000)	0	20	40	60	80
Total Cost ($'000)	500	2,000	3,200	4,800	8,000

How low can the price go and still cover the facility's variable costs?

Answer 1

Ans.

Q('000)	Total Cost($'000)	Fixed Cost	Variable Cost	Average Variable Cost
0	500	500	0	---
20	2,000	500	1,500	75
40	3,200	500	2,700	67.5
60	4,800	500	4,300	71.67
80	8,000	500	7,500	93.75

Note: 1) TC = FC + VC

2) AVC = VC/ Q

3) At Q = 0, where TC = FC = $500,000

4) Fixed cost remains the same at each output level even at zero levels of output.

The lowest price is $67.5 where P = AVC i.e. a shutdown point, up to this point firm will be able to cover the variable cost but If the price falls below this price, the firm will not able to cover up the variable cost in the production of the good and shut down immediately.