Question

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?

Answer 1

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

So, 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 falls to $800.

Hence :

Variable costs are unchanged at $4000 per boat and fixed costs fall to $800 per boat.