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CMA Foundation · Fundamentals of Business Economics and Management · Cost of Production

A firm produces 20 units at a total cost of Rs 2,000 and 25 units at a total cost of Rs 2,200. Fixed cost is Rs 800. Which statement is correct at 25 units?

Average cost at 25 units is Rs 88 (2,200 divided by 25), and the extra cost per added unit between 20 and 25 units is Rs 40 (Rs 200 over 5 units). Average variable cost is Rs 56, not Rs 88, so the other statements fail.

  1. AAverage cost is Rs 88 and marginal cost of the extra 5 units averages Rs 40 per unitCorrect
  2. BAverage cost is Rs 100 and marginal cost is Rs 40
  3. CAverage cost is Rs 88 and average variable cost is Rs 88
  4. DAverage cost is Rs 80 and average variable cost is Rs 56

Explanation

AC at 25 = 2,200/25 = Rs 88. Extra cost for 5 units = 200, so cost per additional unit = Rs 40. AVC = (2,200-800)/25 = Rs 56, so the options claiming AVC Rs 88 or AC Rs 80 or 100 are wrong. AC (88) is above marginal cost (40), so average is falling.

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