# Calculating cost elements of a Business

Questions

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Table 2.a. shows an LED light bulb manufacturer’s total cost of producing LED light bulbs.

 Table 2.a. Cases of LED light bulbs produced in an hour Total Cost 0 \$4,500 10 \$4,900 20 \$5,100 30 \$5,300 40 \$5,400 50 \$5,700 60 \$6,700 70 \$7,900 80 \$9,700 90 \$11,800

1. What is this manufacturer’s fixed cost? Explain why. The manufactured fixed is \$4,500. Fixed cost is the cost at zero quanity, neither does it not depend on the quanity.

2. Assuming that you only know the Total Costs (TC) (as is shown in the Table 2.a. above) explain how you would calculate each of the following:

a. Variable Cost (VC); Total Cost – Fixed Cost = Variable Cost

b. Average Variable Cost (AVC); Total Cost – Fixed Cost/Quantity= Average Variable Cost

c. Average Total Cost (ATC); Total Costs / Quantity = Average Total Cost

d. Average Fixed Cost (AFC); and, Total Costs – Variable Cost / Quantity = Average Fixed Cost

e. Marginal Costs (of a single case). Change in the Total Costs / Change in Quantity = Marginal Costs

3. In Table 3.a., for each level of output, insert into the table the values for:

a. the Variable Cost (VC);

b. the Average Variable Cost (AVC);

c. the Average Total Cost (ATC); and,

d. the Average Fixed Cost (AFC).

 Table 3.a. Cases of LED light bulbs produced in an hour Total Cost Variable Costs Average Variable Costs Average Total Costs Average Fixed Cost a. b. c. d. 0 \$4,500 n/a n/a n/a 10 \$4,900 20 \$5,100 30 \$5,300 40 \$5,400 50 \$5,700 60 \$6,700 70 \$7,900 80 \$9,700 90 \$11,800

e. Given the information you computed in Table 3.a., what is the minimum cost output Level? Explain why. The minimum cost output Level is 60. The minimum cost output is the quantity of output that corresponds to the minimum average total cost of \$111.67.

4. Brenda Smith operates her own farm, raising chickens and producing eggs. She sells her eggs at the local farmers’ market, where there are several other egg producers’ also selling eggs by the dozen. (Brenda operates in a perfectly competitive market in which she is a “price taker.”) In order to make sure she does not lose money on selling eggs, she does an analysis of her costs for producing eggs as shown on Table 4.a.

 Table 4.a. Dozens of eggs Fixed Cost Total Cost Variable Costs Average Variable Costs per dozen Average Total Costs per dozen 0 \$3.35 \$3.35 n/a n/a n/a 10 \$3.35 \$10.50 \$7.15 \$0.72 \$1.05 20 \$3.35 \$16.40 \$13.05 \$0.65 \$0.82 30 \$3.35 \$23.10 \$19.75 \$0.66 \$0.77 40 \$3.35 \$30.00 \$26.65 \$0.67 \$0.75 50 \$3.35 \$36.50 \$33.15 \$0.66 \$0.73 60 \$3.35 \$48.00 \$44.65 \$0.74 \$0.80 70 \$3.35 \$64.40 \$61.05 \$0.87 \$0.92 80 \$3.35 \$80.00 \$76.65 \$0.96 \$1.00 90 \$3.35 \$135.00 \$131.65 \$1.46 \$1.50

a. What is Brenda’s break-even price for a dozen of eggs? Explain how you found that answer.

b. What is Brenda’s shut-down price for a dozen of eggs? Explain how you found that answer.

c. If the market price of a dozen eggs at the local farmers’ market is \$1.45 per dozen, will Brenda make an economic profit? Explain how you determined your answer.

d. If the market price of a dozen eggs at the local farmers’ market is \$1.45 per dozen, should Brenda continue producing eggs in the short run? Explain how you determined your answer.

e. If the market price of a dozen eggs at the local farmers’ market is 72 cents per dozen, will Brenda make an economic profit? Explain how you determined your answer.

f. If the market price of a dozen eggs at the local farmers’ market is 72 cents per dozen, should Brenda continue producing eggs in the short run? Explain how you determined your answer.

g. If the market price of a dozen eggs at the local farmers’ market is 64 cents per dozen, will Brenda make an economic profit? Explain how you determined your answer.

h. If the market price of a dozen eggs at the local farmers’ market is 64 cents per dozen, should Brenda continue producing eggs in the short run? Explain how you determined your answer.

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References:

 Unit 8 Assignment: Break–even Price and Shut–down Price Grading Rubric: Content Percent Possible Points Possible Full Assignment 100% 80 Overall Writing: 20% 16 Correct coversheet information at the top of 1st page 5% 4.00 APA format for answers 3% 2.40 Correct citations 3% 2.40 Standard English no errors 4% 3.20 At least one, or more, references 5% 4.00 Answers: provides complete information demonstrating analysis and critical thinking: 80% 64 Individual Questions: 1. Calculate this manufacturer’s fixed cost 5% 4.00 2. a.–d. Define how this manufacturer’s variable cost, average variable cost, average total cost, average fixed cost, and marginal cost are calculated. 9% 7.20 3. a.–d. Compute this manufacturer’s variable cost, average variable cost, average total cost, and average fixed cost 9% 7.20 3. e. Determine this manufacturer’s minimum cost output level and explain. 6% 4.80 4. a. – Brenda’s break-even price? 8% 6.40 4. b. – Brenda’s shut-down price? 8% 6.40 4. c. – Any economic profit at \$1.45 per dozen? 5% 4.00 4. d. – Continue producing at \$1.45 per dozen? 6% 4.80 4. e. – Any economic profit at \$0.72 per dozen? 6% 4.80 4. f. – Continue producing at \$0.72 per dozen? 6% 4.80 4. g. – Any economic profit at \$0.64 per dozen? 6% 4.80 4. h. – Continue producing at \$0.64 per dozen? 6% 4.80 Sub-total for Individual Questions: 80% 64