Question

A company operates with a mix of fixed and variable costs (which are not given but you need to figure out). Under scenario A, a company needs to produce 3,000 units, calculated average cost is $3 per unit. Under Scenario B, a company needs to produce 6,000 units, its calculated average cost is $2.50.

The company's fixed costs are:

Group of answer choices

$5,000

$4,000

$2,000

$3,000

Answer 1

• Fixed costs are costs that do not change with level of output.
• Using a linear equation, y = mx + c, fixed costs can be found.
  • y = total cost (i.e. variable costs + fixed costs)
  • m = variable cost per unit
  • x = volume of output
  • c = fixed costs (same under both scenarios)
• Equation (1): 3000m + c = $9000
• Equation (2): 6000m + c = $15000
• Subtracting (1) from (2): 3000m = $6000; i.e. m = variable cost per unit = $6000 ÷ 3000 = $2
• Now, fixed cost: Solving equation (1) 3000 × $2 + c = $9000
  • c = fixed cost = $9000 - $6000 = $3000
• or Solving equation (2) 6000 × $2 + c = $15000
  • c = fixed cost = $15000 - $12000 = $3000