Vintage Cellars manufactures a 1,000- bottle wine storage system that maintains optimum temperature (55 57 F) and

Question:

Vintage Cellars manufactures a 1,000- bottle wine storage system that maintains optimum temperature (55– 57 °F) and humidity (50–80 percent) for aging wines. The system has a backup battery for power failures and can store red and white wines at different temperatures. The following table depicts how average cost varies with the number of units manufactured and sold (per month):

Quantity Average Cost

1........... $ 12,000

2 ...........10,000

3........... 8,600

4........... 7,700

5 ...........7,100

6 ...........7,100

7 ...........7,350

8 ...........7,850

9 ...........8,600

10 ..........9,600

Required:

a. Prepare a table that computes the total cost and marginal cost for each quantity between 1 and 10 units.

b. What is the relation between average cost and marginal cost?

c. What is the opportunity cost of producing one more unit if the company is currently producing and selling four units?

d. Vintage Cellars sells the units for $ 9,000 each. This price does not vary with the number of units sold. How many units should Vintage manufacture and sell each month?

Opportunity Cost
Opportunity cost is the profit lost when one alternative is selected over another. The Opportunity Cost refers to the expected returns from the second best alternative use of resources that are foregone due to the scarcity of resources such as land,...