A company currently produces 6,000 units of its single product each period, incurring total variable costs of $60,000 and fixed costs of $42,000. Production will increase to 8,000 units per period if the company expands capacity resulting in changes both to the variable costs per unit and to the total fixed costs. For production of 8,000 units per period total variable costs would be $76,000 and fixed costs $50,000.
What is the reduction in total cost per unit comparing the costs for 8,000 units per period with the unit costs currently being incurred?
a. $0.50
b. $0.75
c. $1.25
d. $0.8
Answer (1)
To find the reduction in total cost per unit when production increases from 6,000 to 8,000 units, we first need to calculate the cost per unit for both production levels and compare them.
Step 1: Calculate the current cost per unit at 6,000 units
Total Variable Costs for 6,000 units = $60,000
Total Fixed Costs for 6,000 units = $42,000
Total Costs for 6,000 units = $60,000 (variable) + $42,000 (fixed) = $102,000
Cost per unit for 6,000 units = Total Units Total Costs = 6 , 000 102 , 000 = 17 dollars per unit
Step 2: Calculate the cost per unit for 8,000 units
Total Variable Costs for 8,000 units = $76,000
Total Fixed Costs for 8,000 units = $50,000
Total Costs for 8,000 units = $76,000 (variable) + $50,000 (fixed) = $126,000
Cost per unit for 8,000 units = Total Units Total Costs = 8 , 000 126 , 000 = 15.75 dollars per unit
Step 3: Find the reduction in cost per unit
To find the reduction, subtract the cost per unit for 8,000 units from the cost per unit for 6,000 units:
17 − 15.75 = 1.25 dollars per unit reduction
Therefore, the reduction in total cost per unit when production increases to 8,000 units per period is $1.25.
Chosen Option: c. $1.25
