Joshua Company produces and sells a product that has variable costs of $7 per unit and fixed costs of $200,000 per year.If production increases from 20,000 units to 25,000 units, the unit cost will _____.
A)increase by $35,000
B)decrease by $8 per unit
C)decrease by $2 per unit
D)not change

Question

Quizplus · Accepted Answer

The total fixed cost will remain the same at $200,000 per year.

The total variable cost for 20,000 units is:
20,000 units x $7 per unit = $140,000

The total variable cost for 25,000 units is:
25,000 units x $7 per unit = $175,000

The total cost for 20,000 units is:
Total cost = Fixed cost + Variable cost 
Total cost = $200,000 + $140,000 = $340,000

The total cost for 25,000 units is:
Total cost = Fixed cost + Variable cost 
Total cost = $200,000 + $175,000 = $375,000

The unit cost for 20,000 units is:
Unit cost = Total cost / Number of units 
Unit cost = $340,000 / 20,000 = $17

The unit cost for 25,000 units is:
Unit cost = Total cost / Number of units 
Unit cost = $375,000 / 25,000 = $15

Therefore, the unit cost will decrease by $2 per unit if production increases from 20,000 units to 25,000 units.

Joshua Company Produces and Sells a Product That Has Variable