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Chapter 2

Q. 2.8

Beech Canoe Refinishing specializes in the refurbishment of upscale custom-made canoes. The company estimates the following total costs for refurbishing canoes in one month:

Number of Canoes Total Cost
10 $100,000
20 150,000
30 190,000
40 220,000
50 250,000
60 280,000
70 320,000
80 370,000
90 470,000
100 600,000

 

a. What is the marginal and average cost for each level of output of the refurbishing activity?
b. The company is currently refurbishing 80 canoes per month. A small resort would like to bring in 10 canoes for refurbishing this month. The resort is willing to spend $90,000 for the refurbishing job. Should Beech accept this additional job?

Step-by-Step

Verified Solution

a.

Number of Units Total Cost Marginal Cost Averge cost
10 $100,000 $100,00 $100,000
20 150,000 50,000 75,000
30 190,000 40,000 63,333
40 220,000 30,000 55,000
50 250,000 30,000 50,000
60 280,000 30,000 46,667
70 320,000 40,000 45,714
80 370,000 50,000 46,250
90 470,000 100,000 52,222
100 600,000 130,000 60,000

b. The company should not accept the offer because the marginal cost of
refurbishing 10 additional canoes is $100,000. The average cost of $52,222 should not be used for this decision