A spirits manufacturer is considering two potential production investments: Option A costs an initial $2 billion and will involve variable costs (labor and material)of $5 per bottle of spirits.Option B costs an initial $4 billion and will involve variable costs (labor and material)of $3 per bottle of spirits.Assuming an annual capital charge equal to 10 percent of the initial costs,what is the average fixed cost at production level of 20,000,000 bottles per year for the Option B facility?

Question

Quizplus · Accepted Answer

First, we need to calculate the total annual cost (fixed + variable) for each option.

Option A: 
Variable cost per bottle = $5 
Number of bottles produced per year = 20,000,000 
Total variable cost = $5 x 20,000,000 = $100,000,000 
Annual capital charge = 10% x $2 billion = $200,000,000 
Total annual cost = $100,000,000 + $200,000,000 = $300,000,000

Option B: 
Variable cost per bottle = $3 
Number of bottles produced per year = 20,000,000 
Total variable cost = $3 x 20,000,000 = $60,000,000 
Annual capital charge = 10% x $4 billion = $400,000,000 
Total annual cost = $60,000,000 + $400,000,000 = $460,000,000

Now, we can calculate the fixed cost for Option B by subtracting the variable cost from the total annual cost:

Fixed cost = Total annual cost - Variable cost 
Fixed cost = $460,000,000 - ($3 x 20,000,000) 
Fixed cost = $460,000,000 - $60,000,000 
Fixed cost = $400,000,000

Finally, we can calculate the average fixed cost per bottle at the production level of 20,000,000 bottles per year:

Average fixed cost = Fixed cost / Number of bottles produced 
Average fixed cost = $400,000,000 / 20,000,000 
Average fixed cost = $20

Therefore, the answer is (C): $23.

A Spirits Manufacturer Is Considering Two Potential Production Investments: Option