Tesla Starts Rolling Out Cars from Shanghai Gigafactory

Elon Musk gambled a fortune in Reno, Nevada when he built a "gigafactory" to build lithium batteries for Tesla electric vehicles. Together with battery-maker Panasonic, he invested $4.5 billion in the factory. When fully completed, the Reno facility will be the largest factory in the world, capable of producing enough battery packs for 500,000 cars a year. Musk says the sheer scale of the factory will enable Tesla to bring down the cost of battery packs by as much as 30 percent, the most expensive component of electric vehicles.

Musk has made the same bet againthis time in China. At a cost of $2 billion, Tesla has built another gigafactory in Shanghai and is already producing Model 3 vehicles. In 2020 Tesla hopes to build at least 35,000 cars, then ramp up to 500,000 cars annually in a few years. Given the success of the Reno plant, few investors want to bet against him.

a. Calculate the average fixed cost at theShanghai factory if the 2020 output level (= 35,000 cars annually) were maintained for 10 years.

$

b. Calculate average fixed cost if Tesla ramps up output to 500,000 cars a year for 10 years.

$

c. If this higher level of output was attained, average fixed cost would decline by percent.