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ACCA Applied Knowledge · Business and Technology · Microeconomic factors

A manufacturer's total cost is 50,000 at 1,000 units and 80,000 at 2,000 units. Assuming fixed costs are 20,000 at both levels and variable cost per unit is constant, what happens to average total cost per unit when output rises from 1,000 to 2,000 units?

Average total cost falls from 50 to 40 per unit. Variable cost stays at 30 per unit, while fixed cost per unit halves from 20 to 10 as the 20,000 fixed cost is spread over twice as many units.

  1. AIt falls from 50 to 40, because fixed cost is spread over more unitsCorrect
  2. BIt rises from 40 to 50, because variable cost rises
  3. CIt stays at 40, because variable cost per unit is constant
  4. DIt falls from 50 to 30, because total cost rises by 30,000

Explanation

Average cost at 1,000 units is 50,000/1,000 = 50. At 2,000 units it is 80,000/2,000 = 40. Variable cost per unit is 30 in both cases (30,000/1,000), so the fall is due to fixed cost per unit dropping from 20 to 10. The option giving 30 ignores fixed costs.

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