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Question
Table 11-9| Fixed Cost | Average Variable Cost | |
| Small plant | $10,000 | $2.00 |
| Medium plant | 15,000 | 1.30 |
| Large plant | 25,000 | 0.50 |
a. You are employed as the company's cost accountant and have been asked to prepare cost estimates for various output levels for each of the three possible plant sizes. Record your calculations in the table below.
Average Cost of Production
| 5,000 Clock Radios | 8,000 Clock Radios | 20,000 Clock Radios | |
| Small plant | |||
| Medium plant | |||
| Large plant |
b. For each of the three output levels, which plant size will generate the lowest average total cost of production?
c. Suppose the firm currently sells 8,000 clock radios per period (using the optimal plant size for this output level). Now, however, it has just secured a long-term contract to supply 20,000 clock radios per period. In the short run, what is the average total cost of producing 20,000 clock radios? Provide a numerical value based on your answer in part a.
d. What happens to average total cost of production in the long run? Provide a numerical value based on your answer in part a.
Answer
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