A Sawmill Bought a Shipment of Logs for $40,000 $\begin{array} { l l l } & \text { Type1 } & \text { Type 2 } \\\end{array}$

question 130

Short Answer

A sawmill bought a shipment of logs for $40,000.When cut,the logs produced 1 million board feet of lumber in the following grades:
Type 1 - 400,000 bd.ft.priced to sell at $0.12 per bd.ft.
Type 2 - 400,000 bd.ft.priced to sell at $0.06 per bd.ft.
Type 3 - 200,000 bd.ft.priced to sell at $0.04 per bd.ft.
How much cost should be allocated to Type 1 and Type 2,respectively?
$\begin{array} { l l l } & \text { Type1 } & \text { Type 2 } \\\end{array}$
A. $\begin{array} { l l l } & \$ 16,000 & \$ 16,000 \\\end{array}$
B. $\begin{array} { l l l } & \$ 13,333 & \$ 4,444 \\\end{array}$
C. $\begin{array} { l l l } & \$ 40,000 & \$ 24,000 \\\end{array}$
D. $\begin{array} { l l l } &\$ 24,000 & \$ 12,000 \\\end{array}$
E. $\begin{array} { l l l } &\$24,000&\$ 8,000\end{array}$

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Definitions:

Average Total Cost

A firm’s total cost divided by output (the quantity of product produced); equal to average fixed cost plus average variable cost.

Economies of Scale

Cost advantages that a business obtains due to expansion, leading to a reduction in the average cost per unit through increased production.

Diseconomies of Scale

The situation in which a business grows to a point where the costs per unit increase, opposed to saving costs, often due to managerial inefficiencies or complexity.

Constant Returns to Scale

A situation in which increasing the amount of all inputs used in production by a certain factor results in output increasing by the same factor.