Assignment: Cost Elements of a Business
In this Assignment, you will define and calculate the remaining six major cost elements of a business, when given the Total Costs and the Quantity Produced, as well as to use the computed costs to determine a minimum cost output level for that business. In addition, you will also clearly explain how the Average Total Cost of a new output level is affected by its share of Fixed Costs and Variable Costs.
Questions
1. When Total Costs (TC) are known, explain how to calculate each of the following:
a. Fixed Costs (FC)
b. Variable Costs (VC)
c. Average Variable Costs (AVC)
d. Average Total Costs (ATC)
e. Average Fixed Costs (AFC)
f. Marginal Costs (MC)
2. Table 1. shows the hourly production and Total Cost estimates for a new manufacturing firm wishing to enter the smart phone market. Fill in the blank cells in columns a., b., c., d., and e. on the table by computing the appropriate values.
Table 1.
|
Smart cell phones produced in an hour
|
Total Cost (TC)
|
Variable Costs (VC)
|
Average Variable Costs (AVC)
|
Average Total Costs (ATC)
|
Average Fixed Cost (AFC)
|
Marginal Cost (MC)
|
|
|
a.
|
b.
|
c.
|
d.
|
e.
|
|
0
|
$3,200
|
|
n/a
|
n/a
|
n/a
|
n/a
|
|
15
|
$3,525
|
|
|
|
|
|
|
30
|
$3,875
|
|
|
|
|
|
|
45
|
$4,250
|
|
|
|
|
|
|
60
|
$4,650
|
|
|
|
|
|
|
75
|
$5,075
|
|
|
|
|
|
|
90
|
$5,525
|
|
|
|
|
|
|
105
|
$6,725
|
|
|
|
|
|
|
120
|
$8,210
|
|
|
|
|
|
|
135
|
$9,950
|
|
|
|
|
|
3. Based on your calculations in completing the table in Question 2, what is this manufacturer's minimum cost output level? Explain your answer.
4. According to our textbook (page 341) when one additional unit is produced, two factors directly impact the change in average total costs, the Spreading effect and the Diminishing Returns effect. In the following two situations explain how the factors of the Spreading effect and the Diminishing Returns effect cause the average total cost to be different.
a. Production of the 10th Gizmo resulted in an average total cost (ATC) of $20, but production of the 11th Gizmo resulted in an average total cost of $22.
b. Production of the 10th Gizmo resulted in an average total cost (ATC) of $20, but production of the 11th Gizmo resulted in an average total cost of $18.