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Cost of wine decreases as output increases -- why?

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The controller predicted the following costs at various levels of wine output:
(see the attached file for proper formatting)

wine output (0.75 litre bottles)
10000 bottles 15000 bottles 20000 bottles
variable production costs 44,400.00 66,600.00 88,800.00
fixed production costs 120,000.00 120,000.00 120,000.00
fixed selling and admin costs 48,000.00 48,000.00 48,000.00
Total 212,400.00 234,600.00 256,800.00

The marketing manager predicted the following prices:
10000 bottles 15000 bottles 20000 bottles
sales price per 0.75 litre bottle 21.6 18 14.4

1 Calculate the unit costs of wine production at each level of output. At what level of output is the unit cost minimized?
2 Calculate company's profit at each level of production.
Assume that the company will sell all of its output. At what production level is profit maximized?
3 Which of the three output levels is best for the company?
4 Why does the unit cost of wine decrease as the output level increases?

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Solution Summary

The cost of wine decreases as output increases are provided. Variable production costs are examined.

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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