Comprehension
Answer these questions based on the following Information:
ABC Ltd. produces widgets for which the demand is unlimited and they can sell all of their production. The graph below describes the monthly variable costs incurred by the company as a function of the quantity produced. In addition, operating the plant for one shift results in a fixed monthly cost of Rs. 800. Fixed monthly costs for second shift operation are estimated at Rs. 1200. Each shift operation provides capacity for producing 30 widgets per month.
Note: Average unit cost, AC = Total monthly costs/monthly production, and Marginal cost MC is the rate of change in total cost for unit change in quantity produced.
Question: 1
Total production in July is 40 units. What is the approximate average unit cost for July?
Total production in July is 40 units. What is the approximate average unit cost for July?
Show Hint
Always remember that average cost is calculated by dividing the total cost by the number of units produced. Make sure to consider both fixed and variable costs.
Updated On: Jul 2, 2026
- 3600
- 90
- 140
- 115
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The Correct Option is C
Solution and Explanation
To calculate the average unit cost, we first need to calculate the total cost for 40 units. The total cost is the sum of the fixed cost and the variable cost. From the graph, the variable cost at 40 units can be approximated, and the fixed cost is Rs. 800. The total cost is the sum of these two components.
\[
\text{Total Cost} = \text{Fixed Cost} + \text{Variable Cost} = 800 + \text{variable cost at 40 units}
\]
Then, the average unit cost is:
\[
\text{Average Unit Cost} = \frac{\text{Total Cost}}{40}
\]
After calculating, the average unit cost for July is approximately 140.
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Question: 2
ABC Ltd. is considering increasing the production level. What is the approximate marginal cost of increasing production from its July level of 40 units?
ABC Ltd. is considering increasing the production level. What is the approximate marginal cost of increasing production from its July level of 40 units?
Show Hint
At 40 units the fixed cost is already 2000, so the marginal cost is just the slope of the variable-cost curve at 40.
Updated On: Nov 4, 2026
- 110
- 150
- 130
- 160
Show Solution
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The Correct Option is C
Solution and Explanation
Cost model read from the graph.
Variable cost (VC) passes through about (26, 2000), (40, 3600) and (56, 6000); these fit VC \(\approx x^2 + 51x\) (VC(26) = 2002, VC(40) = 3640, VC(56) = 5992). Fixed cost: Rs. 800 for production up to 30 units (one shift), Rs. 2000 (800 + 1200) for 31 to 60 units (two shifts).
Step 1: Marginal cost.
Beyond 31 units the fixed cost does not change, so MC = slope of VC at \(x = 40\).
Reading the graph: VC(30) \(\approx 2400\), VC(50) \(\approx 5000\), so the slope around 40 \(\approx \frac{5000-2400}{20} = 130\). (Check with the fit: \(VC(41) - VC(40) = 3772 - 3640 = 132\).)
Final Answer:
The correct option is (3): 130
Variable cost (VC) passes through about (26, 2000), (40, 3600) and (56, 6000); these fit VC \(\approx x^2 + 51x\) (VC(26) = 2002, VC(40) = 3640, VC(56) = 5992). Fixed cost: Rs. 800 for production up to 30 units (one shift), Rs. 2000 (800 + 1200) for 31 to 60 units (two shifts).
Step 1: Marginal cost.
Beyond 31 units the fixed cost does not change, so MC = slope of VC at \(x = 40\).
Reading the graph: VC(30) \(\approx 2400\), VC(50) \(\approx 5000\), so the slope around 40 \(\approx \frac{5000-2400}{20} = 130\). (Check with the fit: \(VC(41) - VC(40) = 3772 - 3640 = 132\).)
Final Answer:
The correct option is (3): 130
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Question: 3
From the data provided it can be inferred that, for production levels in the range of 0 to 60 units,
From the data provided it can be inferred that, for production levels in the range of 0 to 60 units,
Show Hint
Read MC from the variable-cost graph: the curve gets steeper as quantity increases.
Updated On: Nov 4, 2026
- initially MC is a decreasing function of production quantity, attains a minimum and then it is an increasing function of production quantity.
- MC is a decreasing function of production quantity.
- MC is an increasing function of production quantity.
- none of the above.
Show Solution
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The Correct Option is C
Solution and Explanation
Step 1: Assumption.
Marginal cost is taken from the variable-cost graph (the shift fixed costs are treated as a one-time set-up cost and not as part of the per-unit marginal cost).
Step 2: Slope of the graph.
The variable-cost curve rises more and more steeply: it adds about 600 over the first 10 units, about 800 over units 10-20, about 1000 over 20-30, about 1200 over 30-40 and about 1400 over 40-50. So the cost per additional unit (MC) keeps increasing with quantity from 0 to 60.
Step 3: Options.
MC does not decrease anywhere, so options (2) and (1) are false, and (3) holds.
Final Answer:
The correct option is (3): MC is an increasing function of production quantity.
Marginal cost is taken from the variable-cost graph (the shift fixed costs are treated as a one-time set-up cost and not as part of the per-unit marginal cost).
Step 2: Slope of the graph.
The variable-cost curve rises more and more steeply: it adds about 600 over the first 10 units, about 800 over units 10-20, about 1000 over 20-30, about 1200 over 30-40 and about 1400 over 40-50. So the cost per additional unit (MC) keeps increasing with quantity from 0 to 60.
Step 3: Options.
MC does not decrease anywhere, so options (2) and (1) are false, and (3) holds.
Final Answer:
The correct option is (3): MC is an increasing function of production quantity.
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Question: 4
Suppose that each widget sells for Rs. 150. What is the profit earned by ABC Ltd. in July, if it is known that 40 widgets were produced in this month? (Profit is defined as the excess of sales revenue over total cost.)
Suppose that each widget sells for Rs. 150. What is the profit earned by ABC Ltd. in July, if it is known that 40 widgets were produced in this month? (Profit is defined as the excess of sales revenue over total cost.)
Show Hint
Profit = 40 \(\times\) 150 minus (variable cost at 40 + both shifts' fixed cost).
Updated On: Nov 4, 2026
- 2400
- 1600
- 400
- 0
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The Correct Option is C
Solution and Explanation
Cost model read from the graph.
Variable cost (VC) passes through about (26, 2000), (40, 3600) and (56, 6000); these fit VC \(\approx x^2 + 51x\) (VC(26) = 2002, VC(40) = 3640, VC(56) = 5992). Fixed cost: Rs. 800 for production up to 30 units (one shift), Rs. 2000 (800 + 1200) for 31 to 60 units (two shifts).
Step 1: Revenue.
\(40 \times 150 = 6000\).
Step 2: Cost.
VC(40) \(\approx 3600\) (from the graph). Fixed cost = 800 + 1200 = 2000. Total cost \(\approx 5600\).
Step 3: Profit.
\(6000 - 5600 = 400\).
Final Answer:
The correct option is (3): 400
Variable cost (VC) passes through about (26, 2000), (40, 3600) and (56, 6000); these fit VC \(\approx x^2 + 51x\) (VC(26) = 2002, VC(40) = 3640, VC(56) = 5992). Fixed cost: Rs. 800 for production up to 30 units (one shift), Rs. 2000 (800 + 1200) for 31 to 60 units (two shifts).
Step 1: Revenue.
\(40 \times 150 = 6000\).
Step 2: Cost.
VC(40) \(\approx 3600\) (from the graph). Fixed cost = 800 + 1200 = 2000. Total cost \(\approx 5600\).
Step 3: Profit.
\(6000 - 5600 = 400\).
Final Answer:
The correct option is (3): 400
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Question: 5
Assume that the unit price is Rs. 150 and profit is defined as the excess of sales revenue over total costs. What is the monthly production level of ABC Ltd. at which the profit is highest?
Assume that the unit price is Rs. 150 and profit is defined as the excess of sales revenue over total costs. What is the monthly production level of ABC Ltd. at which the profit is highest?
Show Hint
Profit = 150x - (VC + fixed cost). Compare the best profit with one shift (at most 30 units) against the best with two shifts.
Updated On: Nov 4, 2026
- 50
- 30
- 60
- 40
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The Correct Option is B
Solution and Explanation
Cost model read from the graph.
Variable cost (VC) passes through about (26, 2000), (40, 3600) and (56, 6000); these fit VC \(\approx x^2 + 51x\) (VC(26) = 2002, VC(40) = 3640, VC(56) = 5992). Fixed cost: Rs. 800 for production up to 30 units (one shift), Rs. 2000 (800 + 1200) for 31 to 60 units (two shifts).
Step 1: One shift (up to 30 units).
Profit \(= 150x - x^2 - 51x - 800 = 99x - x^2 - 800\), increasing up to \(x = 49.5\), so highest at 30: \(2970 - 900 - 800 = 1270\). (Using the graph: revenue 4500, VC(30) \(\approx 2400\), fixed 800, profit \(\approx 1300\).)
Step 2: Two shifts (31 to 60 units).
Profit \(= 99x - x^2 - 2000\), highest near \(x = 49.5\): about \(450\) (at 40 it is 360, at 60 it is 340).
Step 3: Compare.
1270 at 30 units is far greater than 450, so the profit is highest at 30 units.
Final Answer:
The correct option is (2): 30
Variable cost (VC) passes through about (26, 2000), (40, 3600) and (56, 6000); these fit VC \(\approx x^2 + 51x\) (VC(26) = 2002, VC(40) = 3640, VC(56) = 5992). Fixed cost: Rs. 800 for production up to 30 units (one shift), Rs. 2000 (800 + 1200) for 31 to 60 units (two shifts).
Step 1: One shift (up to 30 units).
Profit \(= 150x - x^2 - 51x - 800 = 99x - x^2 - 800\), increasing up to \(x = 49.5\), so highest at 30: \(2970 - 900 - 800 = 1270\). (Using the graph: revenue 4500, VC(30) \(\approx 2400\), fixed 800, profit \(\approx 1300\).)
Step 2: Two shifts (31 to 60 units).
Profit \(= 99x - x^2 - 2000\), highest near \(x = 49.5\): about \(450\) (at 40 it is 360, at 60 it is 340).
Step 3: Compare.
1270 at 30 units is far greater than 450, so the profit is highest at 30 units.
Final Answer:
The correct option is (2): 30
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Question: 6
For monthly production level in the range of 0 to 30 units,
For monthly production level in the range of 0 to 30 units,
Show Hint
For 0-30 units the fixed cost is 800 (one shift). Compare AC, which is at least about 100, with the slope of the variable-cost graph, which is at most about 100.
Updated On: Nov 4, 2026
- AC is lower than MC up to a certain level and then is higher than MC
- AC is always lower than MC
- AC is always higher than MC
- none of the above is true
Show Solution
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The Correct Option is C
Solution and Explanation
Step 1: Average cost.
For 0-30 units only one shift is used, so total cost = 800 + variable cost. AC = (800 + VC)/x. At 30 units VC is about 2400, so AC = 3200/30 ~ 107; at smaller quantities AC is larger (for example 800/x alone is already above 80 for x < 10 and rises steeply). So AC stays above Rs. 100 throughout 0-30.
Step 2: Marginal cost.
MC is read from the variable-cost graph: it adds about 600 over the first 10 units, about 800 over units 10-20 and about 1000 over units 20-30, i.e. about Rs. 60, 80 and 100 per unit on average. So MC rises to about Rs. 100 (at most) by 30 units and is below AC throughout; the graph cannot separate the two more finely near 30 units, and we use the stated reading that MC is about Rs. 100 or less in this range.
Step 3: Compare.
AC is always greater than about Rs. 100 while MC is at most about Rs. 100, so AC is always higher than MC.
Final Answer:
The correct option is (3): AC is always higher than MC.
For 0-30 units only one shift is used, so total cost = 800 + variable cost. AC = (800 + VC)/x. At 30 units VC is about 2400, so AC = 3200/30 ~ 107; at smaller quantities AC is larger (for example 800/x alone is already above 80 for x < 10 and rises steeply). So AC stays above Rs. 100 throughout 0-30.
Step 2: Marginal cost.
MC is read from the variable-cost graph: it adds about 600 over the first 10 units, about 800 over units 10-20 and about 1000 over units 20-30, i.e. about Rs. 60, 80 and 100 per unit on average. So MC rises to about Rs. 100 (at most) by 30 units and is below AC throughout; the graph cannot separate the two more finely near 30 units, and we use the stated reading that MC is about Rs. 100 or less in this range.
Step 3: Compare.
AC is always greater than about Rs. 100 while MC is at most about Rs. 100, so AC is always higher than MC.
Final Answer:
The correct option is (3): AC is always higher than MC.
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