question archive Espresso Express operates a number of espresso coffee stands in busy suburban malls
Espresso Express operates a number of espresso coffee stands in busy suburban malls
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Espresso Express operates a number of espresso coffee stands in busy suburban malls. The fixed weekly expense of a coffee stand is $600 and the variable cost per cup of coffee served is $0.80. Required: 1. Fill in the following table with your estimates of the company's total cost and the average cost per cup of coffee at the indicated levels of activity 2 Does the average cost per cup of coffee served to increase, decrease, or remain the same as the number of cups of coffee served in a week increases? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Fill in the following table with your estimates of the company's total cost and average cost per cup of coffee at the Indicated levels of activity. (Round the "Average cost per cup of coffee served" to 3 decimal places.) Cups of Coffee Served in a Wook 1,400 1,500 1,600 Fixed cost Variable cost Total cost $ Os OS 0 Average cost per cup of coffee served Required 2 >
Espresso Express operates a number of espresso coffee stands in busy suburban malls. The fixed weekly expense of a coffee stand is $600 and the variable cost per cup of coffee served is $0.80. Required: 1. Fill in the following table with your estimates of the company's total cost and the average cost per cup of coffee at the Indicated levels of activity 2 Does the average cost per cup of coffee served to increase, decrease, or remain the same as the number of cups of coffee served in a week increases? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Does the average cost per cup of coffee served to increase, decrease, or remain the same as the number of cups of coffee served in a week increases? ??? Increase Decrease Remain the same
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Solution Part1.) Computation of Total cost and Average cost of coffee at different levels of output
(Amount in $)
| Particulars | Cups of coffee sold | |||||
| 1,400 cups | 1,500 cups | 1,600 cups | ||||
| Calculation | Amount | Calculation | Amount | Calculation | Amount | |
| Fixed Cost | 600 | 600 | 600 | 600 | 600 | 600 |
| Variable cost | (0.80 * 1,400) | 1,120 | (0.80 * 1,500) | 1,200 | (0.80 * 1,600) | 1,280 |
| Total Cost | 600 + (0.80 *1,400) | 1,720 | 600 +(0.80*1,500) | 1,800 | 600+(0.80*1,600) | 1,880 |
| Average cost per cup of coffee served | (1,720/1,400) | 1.229 | (1,800/1,500) | 1.200 | (1,880/1,600) | 1.175 |
Part 2.) The answer is decrease. The average cost per cup of coffee served decrease as the number of coffee cups served per week increases.This can be seen from the above table also.
Explanation : Fixed costs are period cost which do not change even though the level of activity changes. Hence the amount of fixed costs are constant . The same fixed cost when allocated over an increased number of output keeps reducing per unit fixed cost. For instance in our question the total fixed cost is $600. We can see as the number of coffee cups served is increased, the same fixed cost of $600 is getting allocated to 1400 cups , then 1500 and then 1600 cups. The resultant per unit fixed cost is (600/1400 = 0.429) for 1400 cups, (600/1500 = 0.4) for 1500 cups and (600/1600= 0.375) for 1600 cups. The variable cost per cup ,on the other hand, is same for any level of activity. Hence due to decrease in per unit of fixed cost the Average cost per unit is decreasing as the number of cups is increasing.
