Marino Company's average manufacturing cost was $5.40 when 50,000 units were manufactured and was
$5)25 when 80,000 units were manufactured. How much was Marino's variable cost per unit?

Question

Quizplus · Accepted Answer

The variable cost per unit can be found by understanding the behavior of costs. Total costs are comprised of fixed and variable costs. When production increases, the average cost per unit decreases if there are fixed costs involved, because fixed costs are spread over more units. The decrease in the average cost from $5.40 to $5.25 as production increased from 50,000 to 80,000 units suggests that part of the cost is fixed. The variable cost per unit remains constant regardless of the number of units produced. Since the average cost decreases due to the allocation of fixed costs over more units, the variable cost per unit must be the lower of the two average costs or less. The only option less than both given average costs is $5.00, indicating that the variable cost per unit does not change with the level of production and is the portion of the cost that remains constant on a per-unit basis.

Marino Company's Average Manufacturing Cost Was $5