Evaluating decision-making scenarios using linear profit and cost modeling
Vintage Cellars manufactures a 1,000-bottle wine storage system that maintains optimum temperature (55-57 °F) and humidity (50-80%) 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:
1. Prepare a table that computes the total cost and marginal cost for each quantity between 1 and 10 units.
2. What is the relation between average cost and marginal cost?
3. What is the opportunity cost of producing one more unit if the company is currently producing and selling four units?
4. 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?