don owns a small concrete mixing company His fixed cost is t

don owns a small concrete mixing company. His fixed cost is the cost of the concrete-batching machinery and his mixer trucks. His variable cost is the cost of the sand, gravel, and other inputs for producing concrete; the gas and maintenance for the machinery and trucks; and his workers. He is trying to decide how many mixer trucks to purchase. He has estimated the costs shown in the accompanying table based on estimates of the number of orders his company will receive per week.

A.) For each level of fixed cost, calculate Don\'s total cost for producing 20, 40 and 60 orders per week.

B.) If Don is producing 20 orders per week, how many trucks should he purchase and what will his average total cost be? Answer the same questions for 40 and 60 orders per week.

Solution

PART-1)

PART-1

Quantity of trucks

20 orders

40 orders

60 orders

2

8,000

11,000

18,000

3

8,800

10,800

17,800

4

9,200

16,400

16,400

Working

Quantity of trucks

20 orders

40 orders

60 orders

2

6000 + 2000

6000 + 5000

6000 + 12000

3

7000 + 1800

7000 + 3800

7000 + 10800

4

8000 + 1200

8000 + 3600

8000 + 8400

?

PART-2)

Don must choose the number of trucks which will that minimize the average total cost for each level of output. Thus when producing 20 orders per week should buy two trucks. The average total cost per order will equal $400 (=8000 /20).

When Don is producing 40 orders per week should buy three trucks. The average total cost per order will equal $270 (=10800/40).

When Don is producing 60 orders per week then should buy four trucks. The average total cost per order will then be $273 (=16,400 / 60)