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The Dorilane Company specializes in producing a set of wood patio furniture consisting of a table and four chairs. The set enjoys great popularity, and the company has ample orders to keep production going at its full capacity of 2,000 sets per year. Annual cost data at full capacity follow:
Required:
(c) Assume that production drops to only 1,000 sets annually. Would you expect the average product cost per set to increase, decrease, or remain unchanged? Explain. No computations are necessary.

Respuesta :

Assuming that production drops to only 1,000 sets annually. I would expect the average product cost per set to increase.

The term "average product cost" refers to all costs associated with the production of goods, whether directly or indirectly.

Labor, raw materials, and consumable supplies are examples of production costs.

The cost of production is defined in economics as the expenditures incurred to obtain the factors of production such as labor, land, and capital that are required in the manufacturing process of a product.

This expense is recorded in the company's cost statement.

In a situation where production drops, I would expect the average product cost per set to INCREASE, because fixed costs would be spread out over a few units, causing the average cost per unit to rise.

Hence, if production drops average production cost would increase.

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