...COST OF PRODUCTION CONTENTS 1. Introduction 2. Types of costs 3.1 Opportunity, implicit and explicit costs 3.2 Fixed and variable costs 3.3 Average costs 3. Types of cost curves 4.4 Marginal cost curve 4.5 Average cost curves 4. Costs in Short run and in the Long run 5.6 Short run 5.7 Long run 5.8 Economies of scale 5. Cost analysis in the real world 6.9 Economies of scope 6.10 Experiential learning & technological advances 6.11 Many dimensions 6.12 Unmeasured costs 6. Conclusion SUMMARY REFERENCES SUMMARY This study examines the different types of costs such as opportunity, implicit, explicit, fixed, variable and average costs that a firm would incur in order to carry out the production process. It talks about different types of cost curves to understand various measures of cost and establish a relationship between the changing patterns of different cost curves. It also tells how costs vary significantly in the long run and in the short run and how it effects the firms’ production and pricing decisions. Apart from the standard model, it also tells about the real...
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...predicted the following costs at various levels of wine output. The company’s marketing manager has predicted the following prices for the firm’s fine wines at various levels of sales. Required: 1. Calculate the unit cost of wine production at each level of output. At what level of output is the unit cost minimized? At 10,000 bottles, the unit cost is $21.24 a bottle. At 15,000 bottles, the unit cost is $15.64 a bottle. At 20,000 bottles, the unit cost is $12.84 a bottle. Cost is minimized at 20,000 units. 2. Calculate the company’s profit at each level of production. Assume that the company will sell all of its output. At what production level is profit maximized? At 10,000 bottles, the profit level is $0.36 a bottle, or $3,600. At 15,000 bottles, the profit level is $12.36 a bottle, or $35,400. At 20,000 bottles, the profit level is $12.84 a bottle, or $31,200. Profit is maximized at 15,000 units. 3. Which of the three output levels is best for the company? 15,000 units is the most efficient output for the company, maximixing overall profit levels, while still reducing the price per bottle. 4. Why does the unit cost of wine decrease as the output level increases? Why might the sales price per bottle decline as sales volume increases? The unit cost of the bottles decreases as output increases because the fixed costs remain the same. Regardless of the number of bottles produced, the fixed production, selling, and administrative costs are the same, and the...
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...CHAPTER 7 THE COST OF PRODUCTION QUESTIONS FOR REVIEW 1. A firm pays its accountant an annual retainer of $10,000. Is this an economic cost? Explicit costs are actual outlays. They include all costs that involve a monetary transaction. An implicit cost is an economic cost that does not necessarily involve a monetary transaction, but still involves the use of resources. When a firm pays an annual retainer of $10,000, there is a monetary transaction. The accountant trades his or her time in return for money. Therefore, an annual retainer is an explicit cost. 2. The owner of a small retail store does her own accounting work. How would you measure the opportunity cost of her work? Opportunity costs are measured by comparing the use of a resource with its alternative uses. The opportunity cost of doing accounting work is the time not spent in other ways, i.e., time such as running a small business or participating in leisure activity. The economic, or opportunity, cost of doing accounting work is measured by computing the monetary amount that the owner’s time would be worth in its next best use. 3. Please explain whether the following statements are true or false. a. If the owner of a business pays himself no salary, then the accounting cost is zero, but the economic cost is positive. True. Since there is no monetary transaction, there is no accounting, or explicit, cost. However, since the owner of the business could be employed...
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...1.Total costs The total cost (TC) curve is found by adding total fixed and total variable costs. Its position reflects the amount of fixed costs, and its gradient reflects variable costs Total fixed costs Given that total fixed costs (TFC) are constant as output increases, the curve is a horizontal line on the cost graph. Total variable costs The total variable cost (TVC) curve slopes up at an accelerating rate, reflecting the law of diminishing marginal returns. . OUTPUT | TOTAL FIXED COST | TOTAL VARIABLE COST | TOTAL COST | 1 | 100 | 50 | 150 | 2 | 100 | 80 | 180 | 3 | 100 | 100 | 200 | 4 | 100 | 110 | 210 | 5 | 100 | 150 | 250 | 6 | 100 | 220 | 320 | 7 | 100 | 350 | 450 | 8 | 100 | 640 | 740 | Plotting this gives us Total Cost, Total Variable Cost, and Total Fixed Cost. 2.Average total cost Average total cost (ATC) is also called average cost or unit cost. Average total costs are a key cost in the theory of the firm because they indicate how efficiently scarce resources are being used. Average variable costs are found by dividing total fixed variable costs by output. Average fixed costs Average fixed costs are found by dividing total fixed costs by output. As fixed cost is divided by an increasing output, average fixed costs will continue to fall. Average variable costs Average variable costs are found by dividing total fixed variable costs by output. Always rises at a constant rate. AVC is ‘U’ shaped because of the principle of variable Proportions...
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...| 61 | | | | | | | | | | | 14 | 5 | 1596 | 114 | 23 | | | | | | | | | | | 15 | 5 | 1575 | 105 | -21 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | The three stages of production are identified by the shape and slope of both curves. The first stage is illustrated by an increasingly positive slope. | | | Short-run production of this stage takes place due to increasing marginal returns. When variable input is added to fixed input, the MP of the variable input increases. | The second stage...
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...Efficiency and Cost of Production The management team of AutoEdge is trying to weigh the advantages and disadvantages of leaving South Korea and reentering the United States. Sam Busch, the production manager of AutoEdge would the fixed and variable cost that AutoEdge will experience in South Korea and the United States, if the company chooses to conduct in either company. Sam Busch would also like the short run and the long run expenses of conducting business in the United States. After all the expenses, Sam Busch would to gain knowledge on the financial risks that AutoEdge faces if the production process, is relocated to the United States. Fixed Costs and Variable cost Fixed costs are expenses that remain unchanged over the short run and do not vary or change, in the volume of products produced or sold (Tracy, 2013). Fixed costs are equipment, properties, building and managerial overhead. The Fixed Cost also include the salaries of the Vice President, safety inspectors, security guards, accountants and shipping and receiving employees. Fixed costs are expenses that a company is obligated to pay even if the company produces zero products. Variable cost are expenses or costs that are sensitive to the change in volume of a products production rate and sales. Variable costs include materials, utilities, taxes, hourly salaries and transportation costs. Variable costs will decrease if the production or sales of products decrease and will increase when the production rate or sales...
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...computers, help average and marginal productivity. Computer help to make jobs go faster whether the task is giving multiple people a memo or giving a single person a message that is two cities away, e-mail is very useful for these tasks. Excel makes accounting duties that use to take days, even weeks to accomplish, can now be put together in matters of minutes or an hour. Law of Diminishing Marginal Productivity An economic principle that states that while increasing one input and keeping other inputs at the same level may initially increase output, further increases in that input will have a limited effect, and eventually no effect or a negative effect, on output. The law of diminishing marginal productivity helps explain why increasing production is not always the best way to increase profitability. The law of diminishing marginal productivity shows us that instead of continuing to increase the same input, it might be better to stop at...
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...The Costs of Production Facing a Company Ariel Williams, Samir Soliman ECO561 July 20, 2015 Peter Oburu Outline * In the short run, the total cost of any level of output is the sum of fixed and variable costs (TC = TFC + TVC). * Average fixed, average variable, and average total costs are fixed, variable, and total costs per unit of output; marginal cost is the extra cost of producing one more unit of output. * Average fixed cost declines continuously as output increases; average-variable-cost and average-total-cost curves are U-shaped, reflecting increasing and then diminishing returns; the marginal-cost curve falls but then rises, intersecting both the average-variable-cost curve and the average-total-cost curve at their minimum points. * Diseconomies of scale – average total cost increases as output increases * Constant returns to scale – average total cost is constant as output increases * Economies of scale – average total cost decreases as output increases * MR = MC; marginal revenue equals marginal cost; profit maximization * Short-run shut down point: minimum AVC is the shutdown point; short-run competitive equilibrium: the competitive firm takes its price from the industry equilibrium Discussion Team member one, felt that apparently the quantity of the outcome will affect the AFC (Average Fixed Cost) per unit, therefore the total cost per unit. Take the Automobile industry or heavy equipment’s industry, in this...
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...INVESTMENT AND OPERATING COSTS Investment Decision Probably the most important decision which any management has to take is the decision to invest, that is to incur an expenditure now in the hope of realizing benefits that are expected to occur over a reasonably long future period of time. In order to know whether an investment in a plant for production of fish meal is a worthwhile proposition or not, it is necessary to make a financial analysis of the plant for the period during which it is expected to be in service. For the calculation of the Internal Financial Return, which is the most common so-called discounted cash flow indicator used by the business community and development banks to measure the profitability of an investment project (Bierman, 1966), the following hypothetical case is shown in Table 7. The Internal Financial Return by definition is that rate at which the present value of future operational cash flow equals the investment cost. The rate, 18.5% in the example given, indicates the project can bear a cost of capital (in the form of interest on borrowed money) of 18.5% without showing a net loss. Investment Cost and Size of Fishmeal Plant The same financial indicator, Internal Financial Return, used to measure the overall profitability of one investment project is also useful for making comparisons between different scales of a similar type of operation, that is, generally speaking, fishmeal plant A with a production capacity of X tons per day...
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...HCA530 Supply Production Cost Click Link Below To Buy: http://hwcampus.com/shop/hca530-supply-production-cost/ Write an answer of no less than one-half page in length for each of the first four questions below about economic concepts described in chapters 6 and 7 of the text, Economics of Health and Medical Care. Calculate and fill in the blanks for the table in question 5. 1. Explain the difference between explicit and implicit costs of production. Both explicit and implicit costs are part of the total opportunity costs. Opportunity costs are costs incurred when producing a good; or in the case of health care, providing services for patients, such as doctor’s office or laboratory. Explicit costs it’s the actual monetary payments that are recorded, or input costs that require and outlay of money by the company. For example the wages paid for labor or the rent paid. Explicit costs are the sum of all the monetary payments made for resources used to produce a good. For example in a doctor’s office an explicit cost would be the salary of the person that does the billing, or the salary of the doctor himself. Implicit costs are costs that require no actual monetary payments, they do not require an outlay of money by the firm, and they include the total value of resources used to produce a good, which no direct payment is made. All non-monetary outlay of the production costs associated with all the inputs used in production must be included into these costs. An example...
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...Production Cost Analysis and Estimation Applied Problems BUS640 Managerial Economics Gail Coates October 20, 2015 Isabel Wan Introduction The cost that a business incurs when it combines raw material and labor to produce or manufacture a product or service is called production cost. Knowing the distinction between the fixed and variable inputs in the production process is very important in production and cost analysis (Douglas, 2012). We will be examining two different problems of production cost analysis and estimation applied problems in this paper. We will also show which inputs are fixed and which are variable in one of the problems. During the other problem the marginal cost curve and the incremental cost will be described as well as the profit-maximizing price and output levels. PROBLEM 1 Workers | Oven cost- Fixed | Labor cost- Variable | Total cost | 0 | $1,000 | 0 | $1,000 | 1 | 1,000 | 500 | $1,500 | 2 | 1,000 | 1,000 | $2,000 | 3 | 1,000 | 1,500 | $2,500 | 4 | 1,000 | 2,000 | $3,000 | 5 | 1,000 | 2,500 | $3,500 | 6 | 1,000 | 3,000 | $4,000 | 7 | 1,000 | 3,500 | $4,500 | 8 | 1,000 | 4,000 | $5,000 | Number of pizzas-Variable | Average cost | Pizzas per worker | Increase in production | 0 | 0 | 0 | 0 | 75 | 20.00 | 75 | 75 | 180 | 11.11 | 90 | 105 | 360 | 6.94 | 120 | 180 | 600 | 5.00 | 150 | 240 | 900 | 3.89 | 180 | 300 | 1140 | 3.51 | 190 | 240 | 1260 | 3.57 | 180 | 120 | 1360 | 3.68 | 170 | 100 | ...
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...LASA 1: The Costs of Production https://homeworklance.com/downloads/eco-202-m3-assignment-2-lasa-1-the-costs-of-production/ Joseph Farms, Inc. is a small firm in the agricultural industry. They have asked you to help them complete the limited data they have gathered in an effort to enable effective decision-making. Some work can be done using MS Excel but it must be copied to an MS Word file for the final submission of this assignment. To assist Joseph Farms, Inc., respond to the following: • Using MS Excel or a table in MS Word, complete Table-1 (Joseph Farms, Inc., Cost and Revenue Data). o Assume that the price is $165. o Assume the fixed costs are $125, at an output level of 1. o Assume that the data represents a firm in pure competition. o Show your calculations. • Explain theMC=MR Rule. Describe the market structures to which this rule applies. • Create a chart to illustrate the data in Columns 9 and 10. • Describe the profit maximizing (or loss minimizing) output for this firm. Explain why or why not there an accounting profit? • Explain why a firm in pure competition is considered to be a “price taker.” • (Assignment continues below Table-1.) Table-1: Joseph Farms, Inc., Cost and Revenue Data Column 1 Column 2 Column 3 Column 4 Column 5 Column 6 Column 7 Column 8 Column 9 Column 10 Column 11 Output Level Price per unit Total Fixed Cost Total Variable Cost Total Cost Average Fixed Cost Average Variable Cost Average Total Cost Marginal ...
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...Critique of “Production, Information Costs, and Economic Organization” by Armen Alchian and Harold Demsetz Theoretical aspect: What main theoretical contributions does the paper make? / What is the theoretical paradigm it seeks to advance? • This article expounds on classical characterizations of the firm as a centralized, authoritarian entity or concept expected to yield productive outcomes often through autocratic means. Contrary to these characterizations, Alchian and Demsetz argue that the concept of the firm is based on a team-based contractual agent requiring cooperative and voluntary inputs from resource owners and employees (or suppliers), all of whom are input owners, in lieu of an authoritarian relationship between superiors and subjects. The article further explains the team process and why it prompts the necessity for the contractual form, the firm. What are the core assumptions behind the authors’ ideas? • Productivity does not automatically create its own reward. This in fact is reversed, according to Alchian and Demsetz. A particular type of reward stimulates a particular productive response (reward creates productivity.) Understanding this, it is essential, then, to appropriately measure both input productivity and rewards. • Productivity levels and rewards are directly related. The firm, as it is a team-based system of economic organization, will operate best or yield its highest level of productivity when the right rewards are in place to...
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...By having multiple productions plants globally, it is able to create flexibility and backup options should one of their plants fail to deliver when there is natural disasters or uncertainty within the country. During the Thailand floods, its production was greatly affected as its plants were shut down and unable to operate due to the damage caused by the flood. (Thailand was responsible for the production of 891,000 forecasted vehicles, one of the biggest in SEA). Due to the crippling of its plants in Thailand, Toyota has to scale back its productions in the rest of SEA due to issues faced while exporting certain parts from Thailand. The car maker estimates the disruption in the parts supply chain has affected about 100 kinds of parts. The overall output loss caused by the floods amounted to an estimate of 37,500 vehicles. ISSUES FACED: Toyota has to be prepared for unforeseeable circumstances such as natural disasters. As shown, during the Thailand floods in 2011, its production was scaled back by 37,500 vehicles. Backup supplies from its other branches around the world creating the same vehicle parts could be supplied to SEA during this period to alleviate the burden faced by the plants in Thailand. OPINION: Safety is one of Toyota’s key concerns and also selling point. This must be ensured from the various parts that make the car, from the start to the end. It is understandable that Toyota decided to specialize each plant so that they can be focused on what they produce...
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...out over a co-worker * 10 votes to dismiss Foreman Edward George The workers are the most important asset to the company, so their interest should be first. Second, you have to figure out what to do about the votes to dismiss Ed George. Solutions: Talk to Ed George about his problems with his co-workers. Hold a meeting and get even more workers involved in the voting process, the take another vote. Item#4 Problems: * Overloading which can result in interruption of electrical power. * Not being reachable for Southern Power Solution: Contact Southern Power ASAP. See if they could come out and help with the problem. Item#5 Problem: * Balancing your work and his until Wednesday * Upping production by mid December in the long run Upping production would be the most important problem, because it’s long term. Balancing your work load is just something you have to do until your boss gets back. Solution: Schedule your...
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