The table above shows estimates of fixed cost per period and average variable

The table above shows estimates of fixed cost per

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Clock It To Me manufactures clock radios. The table above shows estimates of fixed costper period and average variable cost for three possible plant sizes.a.You are employed as the companyʹs cost accountant and have been asked to prepare cost estimates forvarious output levels for each of the three possible plant sizes. Record your calculations in the table below.Average Cost of Production5,000 ClockRadios8,000 ClockRadios20,000 ClockRadiosSmall plantMedium plantLarge plantb.For each of the three output levels, which plant size will generate the lowest average total cost ofproduction?c.Suppose the firm currently sells 8,000 clock radios per period (using the optimal plant size for this outputlevel). Now, however, it has just secured a long-term contract to supply 20,000 clock radios per period. In theshort run, what is the average total cost of producing 20,000 clock radios? Provide a numerical value based onyour answer in part a.d.What happens to average total cost of production in the long run? Provide a numerical value based onyour answer in part a.Answer: a.Average Cost of Production5,000 ClockRadios8,000 ClockRadios20,000 ClockRadiosSmall plant$4.00$3.25$2.50Medium plant4.303.182.05Large plant5.503.631.75b.For an output of 5,000 units, the lowest average cost is achieved with a small plant size. For anoutput of 8,000 units, the lowest average cost is achieved with a medium plant size and for output 20,000units the lowest average cost is achieved with a large plant size.c.The firm currently has a medium-sized plant. In the short run, average total cost of producing20,000 units is $2.05.d.In the long run, when it is able to build a larger plant, the average total cost will fall to $1.75.Diff: 3Page Ref: 368-369/368-369Topic: The Short Run and the Long RunLearning Outcome: Micro 12: Apply methods for measuring and analyzing the effects of inputs and costs on the supplycurveAACSB: Analytic Skills42
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