Problem
The Use of Averages Average labor and materials costs were used in previous challenges, but only as a mean of estimating the total labor and materials costs associated with each alternative. The average of the other factory costs and the averages of selling and administrative expenses didn't enter the analysis because these costs weren't expected to be proportionally variable with volume. We use averages only when they are valid predictors of totals -that is, when total cost appears likely to vary proportionally with variations in volume. Suppose Van Horn's service department now serves 2,000 customers at an average cost of $10 a month. It has an opportunity to pick up an additional 500 customers without affecting the volume of business it does with its present customers or the prices they pay. While the additional volume will increase total cost, it will reduce the department's average cost to $9.2S a month per customer. Since the new customers will pay only $9 a month for service, sewing these potential new customers appears to be a losing business.
Make your own averages analysis to confirm if this new business would be acceptable or if it will only incur in losses, assuming that the present estimates are valid.