Question

A sprit manufacturer is considering a production investment associated with a fixed cost of $4 million and a variable cost (labor and material) of $3 per bottle. What is the average fixed cost at production level of 200 thousand bottles per year?

a. $3
b. $20
c. $23
d. $10

Answer 1

Option (b) is correct.

Step-by-step explanation:

Given that,

Fixed cost = $4 million

Variable cost (labor and material) = $3 per bottle

Production level = 200,000 bottles per year

Average fixed cost is determined by dividing the total fixed cost by production level.

Therefore,

Average fixed cost at 200,000 bottles per year:

= Fixed cost ÷ Production level

= $4,000,000 ÷ 200,000

= $20