Final answer:
The allocation of cost to grade A and grade B peaches depends on quantity produced and cost structure. When a larger quantity of grade B peaches is produced, the average cost per unit might decrease compared to grade A peaches, assuming economies of scale are applicable and other factors remain constant.
Step-by-step explanation:
The effect on the allocation of cost to grade A and grade B peaches based on their quantities can be inferred from understanding the principles of cost of production and productively efficient economies. When a company is dealing with products such as peaches that have different grades, the cost of production is likely allocated based on the quantity of each grade produced. If there are 2,000 pounds of grade A peaches and 4,500 pounds of grade B, the total cost allocated to each grade might differ, reflecting the proportionate share of the total production volume. This allocation affects the average cost per unit, as more units spread fixed costs over a larger production base.
Assuming that the cost structure is similar to what we see in manufacturing firms where costs go down with higher production levels due to economies of scale, this could potentially mean that the cost per pound of grade B peaches is lower than that of grade A peaches because more grade B peaches are produced. However, this relies on the assumption that other variables remain constant, and the production processes between the two grades do not differ substantially in terms of costs. In a downward-sloping average cost curve scenario, as mentioned in the reference provided, two smaller firms with the same total output as a single larger firm would have higher average costs of production. Applied to the scenario of peaches, if grade A and grade B peaches are treated as products from 'smaller firms', the grade with the lower production quantity (grade A) may have a higher cost per pound than grade B.