Frank's clothing company produces hooded sweaters. His fixed cost is the cost of his knitting machines, and his variable cost comes from maintenance for the machines and his workers. Use the table to answer the following questions.
1 $2,000 $2,200 $3,800 $10,800
2 $3,000 $1,800 $2,400 $10,500
3 $4,000 $1,400 $1,700 $8,150
See table from hosted on image shack
http://img135.imageshack.us/my.php?image...
How many machines will Frank choose to use in the long run if he plans to produce 60 sweaters?
possible answers
1
2
3
Fixed cost vs. variable cost?
Total cost (TC) is the sum of fixed cost (FC) and variable cost (VC). That is, TC=FC+VC. The problem here is to find the number of machines that can produce 60 sweates at least total cost. Since the total cost of using one machine to produce 60 sweaters is 2,000+3,800=$5,800, the total cost of using two machines is 3,000+2,400=$5,400, and the total cost of using three machines is 4,000+1,700=$5,700 , Frank will use two machines.
Fixed cost vs. variable cost?
In the long run a firm will produce up to the point where average total cost begins to increase. Average total cost with one machine is $96.67 ($5800/60), average total cost of two machines is $90 ($5400/60), and average total cost of three machines is $95 ($5700/60). With 3 machines Frank starts to see dis-economies of scale. He will therefore choose two machines in the long run.
