Question 1

The following schedule of costs is available:

Schedule of costs
	1,000 units	2,000 units
Total variable costs		$3,000
Total fixed costs
Total operating costs
Variable costs per unit
Fixed cost per unit		$2.00
Average cost per unit

Required:

1. What is the total operating cost at 1,000 units, and what is the average cost per unit at 1,000 units?

2. What is the danger in using average cost to make predictions about costs at varying production levels?

3. What sorts of challenges would you have in making predictions of cost behavior in an accounting report that reports line items like Cost of goods sold, and Selling and Administrative expenses:

Income Statement
Sales		$XXXX
Cost of goods sold		XXXX
Gross margin		XXXX
Selling and Administrative expenses		XXXX
Net income		XXXX

Question 2

Shelley is about to make an investment in a risky project on January 1, 2015. It might turn out well (PV of $2,000) or it might turn out poorly (PV of $0). The 'might turn out well' outcome has a Present Value of $2,000, representing an annuity of high payoffs. The 'might turn out poorly' outcome has a Present Value of $0, representing a zero payoff. It