DigiWatch Plans to Open a New Production Facility to Produce

question 52

Essay

DigiWatch plans to open a new production facility to produce digital watches. Based on previous experience, the firm estimates that the fixed costs of the plant will be $366,000 per year, and that average variable cost will be: AVC = 7.00 + .002Q.
(a) Compute the total cost and average cost for the first year of production at an output of 6,000 watches.
(b) In the second year of production, DigiWatch revamped its assembly operations to improve efficiency. The firm produced 8,000 watches at a total cost of $498,000. How much did the revamp reduce average cost in the second year?

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Definitions:

Investment Opportunity

A potential venture or avenue through which an investor can put money into assets or projects expecting a favorable financial return.

Combined Return On Investment

A measure assessing the total financial return of different investments or the aggregate performance of an entire investment portfolio.

Contribution Margin Ratio

A financial metric that shows the percentage of sales revenue that exceeds variable costs, contributing to covering fixed costs and generating profit.

Residual Income

The net income that exceeds the minimum required return on investment or capital; often used as a performance measure in managerial accounting.