# Calculating average product cost

Burger Doodle is a fast-food restaurant that processes an average of 680 food orders each day. The average cost of each order is $6.15. Four percent of the orders are incorrect, and only 10% of the defective orders can be corrected with additional food items at an average cost of $1.75. The remaining defective orders have to be thrown out.

a. Compute the average product cost

b. In order to reduce the number of wrong orders , Burger Doodle is going to invest in a computerized ordering and cash register system. The cost of the system will increase the average order by $0.05 and will reduce defective orders to 1%. What is the annual net cost effect of this quality-improvement initiatives?

https://brainmass.com/economics/output-and-costs/calculating-average-product-cost-335648

#### Solution Preview

a. Compute the average product cost

I=input=680 orders

%G=percent of good quality product=96%

%R=percent of goods that can be reworked=10%

Yield=Y=I*(%G)+I*(1-%G)*(%R)=680*96%+680*(1-96%)(10%)=655.52

Kd=direct manufacturing cost per unit=$6.15

Kr= rework cost per unit=$1.75

R= reworked units=I*(1-%G)*(%R)=680*(1-96%)*(10%)=2.72

Average Product ...

#### Solution Summary

Solution depicts the steps to calculate the average cost. It also analyzes the effect of proposed quality improvement program on annual cost savings.