Perreth Drycleaners has capacity to clean up to 8000 garment

Perreth Drycleaners has capacity to clean up to 8,000 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, Davis Perreth, erroneously uses the average cost per unit at full capacity to predict total costs at a volume of 5,000 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.) 5,000 6,500 8,000 Garments Garments Garments 5,200 Total variable costs Total fixed costs Total operating costs Variable cost per garment Fixed cost per garment Average cost per garment 2.40

Solution

5000

6500

8000

Part 1)

Garments

Garments

Garments

Total Variable Cost

$    4,000.00

$    5,200.00

$    6,400.00

Total Fixed Cost

$ 15,600.00

$ 15,600.00

$ 15,600.00

Total Operating Cost

$ 19,600.00

$ 20,800.00

$ 22,000.00

Variable Cost per Garment

$            0.80

$             0.80

$            0.80

Fixed Cost Per Garment

$            3.12

$             2.40

$            1.95

Average Cost Per Garment

$            3.92

$             3.20

$            2.75

Working Note

Total Fixed cost

(2.4 *6500)

$ 15,600.00

Variable cost

(5200/6500)

$             0.80

Part 2)

Average cost per Garment changes because of the change in the total number of Units.

Total Fixed cost does not change with change in number of garments dry-cleaned. Only total Variable cost change according to change in Units.

Fixed cost is Distrusted on Number of Garments Dry-cleaned and the cost decreases when number of garments Increase and Vise versa.

Part 3)

If average cost of 8000 garments is used then the total cost would be Underestimated.

This is Explained Below

Average cost per Garment

$            2.75

Units of garments

         5000

$ 13,750.00

Less: Actual cost on 5000 Units

$ 19,600.00

Underestimated cost

$ (5,850.00)

The cost is Underestimated because at 8000 units the fixed cost per unit is lower as compared to fixed cost per unit at 5000 units.

Fixed cost does not change with change in number of units. They remain same till the capacity which is 8000 units. The Fixed cost would be $ 15600 even if number of Dry-cleans is Zero.

		5000	6500	8000
Part 1)		Garments	Garments	Garments
	Total Variable Cost	$    4,000.00	$    5,200.00	$    6,400.00
	Total Fixed Cost	$ 15,600.00	$ 15,600.00	$ 15,600.00
	Total Operating Cost	$ 19,600.00	$ 20,800.00	$ 22,000.00
	Variable Cost per Garment	$            0.80	$             0.80	$            0.80
	Fixed Cost Per Garment	$            3.12	$             2.40	$            1.95
	Average Cost Per Garment	$            3.92	$             3.20	$            2.75