A factory currently manufactures and sells 800 boats per year. Each boat costs $5,000 to produce. $4,000 of the per-boat costs are for materials and other variable costs, while the per-boat fixed costs (incurred on yearly rent, administrative, and other fixed costs) are $1,000. If boat orders increase to 1000 boats per year, how do per-unit costs change?
Answers
Answer :
Variable costs are unchanged at $4000 per boat and fixed costs falls to $800 per boat.
Explanation -
Given :
Cost of per boat = $5000 in which $4000 are variable cost and $1000 are fixed.
Finding Variable cost -
1 boat = $4000
800 boats =4000 x 800 = $3,200,000
1000 boats = 1000 x 4000 = $4,000,000
1 boat = 4,000,000/1000 = $4000
So, Variable cost of per boat is $4000
Finding Fixed cost -
1 boat = $1000
800 boats = 800 x 1000 = $800,000
1000 boats = $800,000 ( Fixed cost remain same)
1 boat = $800,000/1000 = $800
So, Fixed cost per boat = $800
The fixed costs $800,000 are spread to 1000 boats. So, this result in fixed cost per boat is $800.
Hence :
Variable costs are unchanged at $4000 per boat and fixed costs fall to $800 per boat.
Variable costs remain unchanged at $4000 per boat wereas the fixed costs goes below $800 per boat.
We will see here how this happens.
The given cost of a boat is $5000 out of which $4000 are variable cost and $1000 are fixed.
To find the variable cost of a boat, we need the price of one, which is $4000.
Therefore, 800 boats will cost 4000 x 800 = $3,200,000.
Hence, 1000 boats will cost 1000 x 4000 = $4,000,000.
The variable cost of a boat is 4,000,000/1000 = $4000.
So, the variable cost per boat stays at $4000.
For finding the fixed cost. we need the price of a boat, that is $1000.
Therefore, for 800 boats, the price is $800,000.
For 1000 boats, the price will be $800,000 as the fixed cost remains the same.
Therefore, for 1 boat, $800,000/1000 = $800.
Hence, the fixed cost per boat is $800
The fixed cost of $800,000 are spread over all 1000 boats.
This results in a fixed cost boat price of $800.
Hence, variable costs remain unchanged at $4000 a boat whereas the fixed cost falls to $800 for a boat.