Question

Johnson's Candles has fixed costs of $4000 each month. Its average variable costs
are $3 per candle. The firm's current level of demand is 2500 candles per month.
The average price of its candles is $6.
a) Using an example, explain what is meant by a fixed cost of production. (2)
b) Calculate the firm's current average costs. (2)
c) Calculate the firm's current total costs of production each month. (2)
d) Calculate the profit if demand increases to 3000 candles per month. (2)

Answer 1

Following answers given below.

Explanation:

Given:

Fixed costs = $4,000

Variable costs  = $3 per candle

Current level of demand = 2,500 candles per month.

Average price = $6 per candle

Computation:

A. Rent, machine are used as fixed cost of production.

B. Current average cost = (Fixed costs + Variable costs) / Current level of demand

Current average cost = [$4,000 + (2,500 x $3)] / 2,500

Current average cost = [$4,000 + $7,500] / 2,500

Current average cost = $4.6

C. Total cost of production = Fixed costs + Variable costs

Total cost of production = [$4,000 + (2,500 x $3)]

Total cost of production = $11,500

D. Profit = (3,000 x $6) -  [$4,000 + (3,000 x $3)]

Profit = $18,000 -  [$4,000 + $9,000]

Profit = $5,000

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