Harvey’s Hardware is thinking about starting a line of lawnmowers to serve its customer base in the summer. The lawnmowers would be priced at $100 and Harvey the manager believes that they would sell 3 units. They have the following estimated costs. Units Produced Labor Cost Total cost
0 0 100
1 50 150
2 100 200
3 200 300
4 350 450
What is the marginal cost of producing the third unit?
a. $400
b. $300
c. $200
d. $100

Harvey's Hardware

Marginal cost of producing the third lawnmowers:

d. $100

Explanation:

Harvey's marginal cost for producing the third unit of lawnmowers is the additional cost that resulted when the total cost increased from $200 to  $300.  However, it can be deciphered from the case that the marginal cost for Harvey, which it is supposed to be  a variable cost, is traceable to the direct labor costs.  This implies that the fixed cost element for Harvey in the production of the lawnmowers has been relatively fixed at $100.  It does not vary with the volume of production, while the direct labor costs vary with the volume of lawnmowers produced by Harvey.

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