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Deriving average costs for different levels of output

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The Hartford Company is considering three types of plants to make a particular electronic device. Plant A is much more highly automated than plant B, which in turn is more highly automated than plant C. For each type of plant, average variable cost is constant so long as output is less than capacity, which is the maximum output of the plant. The cost structure for each type of plant is as follows:

Plant A Plant B Plant C
Avg. Variable Costs
Labor $1.10 $2.40 $3.70
Materials .90 1.20 1.80
Other .50 2.40 2.00
Total 2.50 6.00 7.50
Total fixed costs 300,000 75,000 25,000
Annual capacity 200,000 100,000 50,000

a. Derive the average cost of producing 100,000, 200,000, 300,000, and 400,000 devices per year with plant A. (For outputs exceeding the capacity of a single plant, assume that more than one plant of this type is built.)

b. Derive the average cost of producing 100,000, 200,000, 300,000, and 400,000 devices per year with plant B.

c. Derive the average cost of producing 100,000, 200,000, 300,000, and 400,000 devices per year with plant C.

d. Using the results of parts a through c, plot the points on the long-run average cost curve for the prouction of these electronic devices for outputs of 100,000, 200,000, and 400,000 devices per year.

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Solution:

a. Derive the average cost of producing 100,000, 200,000, 300,000, and
400,000 devices per year with plant A. (For outputs exceeding the capacity
of a single plant, assume that more than one plant of this type is built.)

Plant A Capacity
Capacity=200000
Variable Costs per unit=2.5
Fixed Costs=300000

Production level
Plant A 100000 200000 300000 400000
Variable Costs 250000 500000 750000 1000000
Number of Plants Needed 1 1 2 2
Fixed Costs
= Fixed costs*number ...

Solution Summary

Solution describes the steps to find out average total costs for different levels of output for Plant A, Plant B and Plant C.

$2.19