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Assignment
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)
Fixed costs include all those costs that do not change based on the production level. They include all the costs to pay land, labor, and the capital in the business (Boyes" Melvin, 2016, p. 162). One can obtain the fixed cost by adding all the payments that a business must pay for a year even if no production takes place.
b. Variable Costs (VC)
The variable costs include all the additional payments incurred for additional resources as the output increases. The variable costs can be obtained by taking all the totals costs minus the fixed cost (Boyes" Melvin, 2016, p. 162). TC=FC+VC (Q) where FC is fixed cost, TC is the Total cost, VC is the variable Cost, and Q is the quantity. So VC (Q)= TC- FC.
c. Average Variable Costs (AVC)
According to Boyes and Melvin (2016, p. 163), AVC is the total variable cost divided by the total cost.
d. Average Total Costs (ATC)
The average Total costs (ATC) is derived by dividing the total cost by the quantity of output (Boyes " Melvin, 2016, p. 159).
e. Average Fixed Costs (AFC)
AFC is the total fixed cost divided by the total cost or total output (Boyes" Melvin, 2016, p. 163).
f. Marginal Costs (MC)
Boyes" Melvin (2016, p.181) avers that the marginal cost (MC) is calculated by obtaining the change in Total cost (TC) divided by the Change in total output (Q).
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
0
n/a
n/a
n/a
n/a
15
$3,525
325
21.67
235.00
213.33
21.67
30
$3,875
675
22.50
129.17
106.67
11.67
45
$4,250
1050
23.33
94.44
71.11
8.33
60
$4,650
1450
24.17
77.50
53.33
6.67
75
$5,075
1875
25.00
67.67
42.67
5.67
90
$5,525
2325
25.83
61.39
35.56
5.00
105
$6,725
3525
33.57
64.05
30.48
11.43
120
$8,210
5010
41.75
68.42
26.67
12.38
135
$9,950
6750
50.00
73.70
23.70
12.89
3. Based on your calculations in completing the table in Question 2, what is this manufacturer’s minimum cost output level? Explain your answer.
The manufacturer’s minimum cost output is achieved at the quantity that corresponds to the least Average Total Costs (ATC), and this occurs when ATC is at 61.39, and the quantity is at 90 smart cell phones produced in an hour.
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 causes 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.
According to Wells and Krugman (2012) on the diminishing returns effect, they state that the larger the output, the greater is the amount of the variable input that is needed to produce the additional units and this leads to a higher average total cost. Because of this, the above scenario supports the diminishing returns effect.
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.
According to Wells and Krugman (2012) on the spreading effect, they state that the larger the output, the greater the quantity of the production on which the fixed cost is spread. As a result, this leads to a lower average total cost. Because of this, the above scenario supports the spreading effect.
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References
Boyes, W., " Melvin, M. (2016). Microeconomics (10th ed.). Boston: Cengage Learning.
Krugman, P., " Wells, R. (2015). Microeconomics (4th ed.). New York, NY: Worth Publishers.
Unit 7 Assignment: Cost Elements of a Business Grading Rubric
Content
Percent Possible
Points Possible
Full Assignment
100%
40
Overall Writing:
20%
8
Correct coversheet information at the top of 1st page
5%
2.00
APA format for answers
3%
1.20
Correct citations
3%
1.20
Standard English, no errors
4%
1.60
At least one, or more, references
5%
2.00
Answers: provides complete information demonstrating analysis and critical thinking:
80%
32
Individual Questions:
1. a. - Explain the calculation of variable cost.
6%
2.40
1. b. - Explain the calculation of average variable cost.
6%
2.40
1. c. - Explain the calculation of average total cost.
6%
2.40
1. d. - Explain the calculation of average fixed cost
6%
2.40
1. e. - Explain the calculation of marginal cost
6%
2.40
2. a. - Calculate this manufacturer’s variable cost.
6%
2.40
2. b. - Calculate this manufacturer’s average variable cost.
6%
2.40
2. c. - Calculate this manufacturer’s average total cost.
6%
2.40
2. d. - Calculate this manufacturer’s average fixed cost
6%
2.40
2. e. - Calculate this manufacturer’s marginal cost
6%
2.40
3. - Identify this manufacturer’s minimum cost output level.
6%
2.40
4. a. - Explain why the average total cost of 11th Gizmo is $22.
7%
2.80
4. b. - Explain why the average total cost of 11th Gizmo is $18.
7%
2.80
