Question

Option A costs an initial $2 billion and will involve variable costs (labor and material) of $5 per bottle of spirits. Option B costs an initial $4 billion and will involve variable costs (labor and material) of $3 per bottle of spirits. Assuming an annual capital charge equal to 10 percent of the initial costs, what is the average fixed cost at production level of 20,000,000 bottles per year for the Option B facility

Answer 1

Answer: 20

Step-by-step explanation:

Total cost of Option B = 4 billion

Total fixed cost = 10% of 4 billion

= 10/100 × 4,000,000,000

= 0.1 × 4,000,000,000

= 400,000,000

The average fixed cost is the total cost divided by the total number of output that is given. In this case, this can be calculated as:

= 400,000,000/20,000,000

= 20

The average fixed cost at production level of 20,000,000 bottles per year for the Option B facility will be 20.