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Activity 19.5: comparing costs between two businesses
the following cost data has been collected from two shoe manufacturing companies
company a
company b
annual output - pairs of shoes
20 000
700 000
variable cost per pair of shoes
$4
$2.50
annual fixed costs
$120000
$2,1m
a calculate the total annual cost of manufacturing shoes for both businesses
b calculate the average cost per unit (pair of shoes)
than for company a.
d explain two benefits gained by company b as a result of lower average cost (cost per
unit)

Sagot :

anthougo

a) The computation of the total annual costs of manufacturing shoes for both businesses is as follows:

                                  Company A      Company B

Annual fixed costs     $120,000        $2.1 million

Total variable costs    $80,000       $1,750,000

Total costs                $200,000      $3,850,000

b) The computation of the average cost per unit (pair of shoes) for Company A is $10 ($200,000/20,000).

c) The computation of the average cost per unit (pair of shoes) for Company B is $5.50 ($3,850,000/700,000).

d) The two benefits gained by Company B as a result of lower average cost (cost per unit) are:

  1. It can produce and sell more units than Company A.
  2. It makes more profits than Company A, especially if the selling price is the same for both companies.

What is the cost of production?

The cost of production is made up of two elements: variable and fixed costs.

The variable element depends on the units of production.  The fixed element of the production cost is a period cost that does not vary within a relevant range.

Data and Calculations:

                                  Company A      Company B

Annual output                20,000            700,000

Variable cost per pair      $4.00                $2.50

Annual fixed costs     $120,000        $2.1 million

Total variable costs    $80,000       $1,750,000

Total costs                $200,000      $3,850,000

Learn more about production costs at https://brainly.com/question/25109150

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