# Unit 7 Assignment: Cost Elements of a Business

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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)

Total costs are a summation of Fixed Costs and Variable Costs. Therefore, given Total Costs, you subtract the VC and remain with FC. Sometimes, if VC=0, the FC=TC.

FC = TC – VC

b. Variable Costs (VC)

To find Variable Costs, subtract FC from TC.

VC = TC – FC

c. Average Variable Costs (AVC)

Average Variable cost is found by dividing the Variable Cost by the Output. Therefore;

VC = TC – FC

Average Variable Cost = (TC – FC) / (Output)

d. Average Total Costs (ATC)

Average Total Costs are the costs per unit of output. Derived by dividing Total Cost by Output

ATC = TC / (Output)

e. Average Fixed Costs (AFC)

The Fixed Costs per unit of output. Given by;

AFC = (TC-VC) / Output

f. Marginal Costs (MC)

Marginal Costs is given by the change in Total Costs divided by change in Output.

MC = (change in TC) / (change in Output)

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 \$3,200 n/a n/a n/a n/a 15 \$3,525 \$3,525 \$235 \$235 0 \$21.70 30 \$3,875 \$3,875 \$291 \$291 0 \$23.30 45 \$4,250 \$4,250 \$94 \$94 0 \$25 60 \$4,650 \$4,650 \$77.5 \$77.5 0 \$26.70 75 \$5,075 \$5,075 \$67.7 \$67.7 0 \$28.30 90 \$5,525 \$5,525 \$61.4 \$61.4 0 \$30 105 \$6,725 \$6,725 \$64 \$64 0 \$80 120 \$8,210 \$8,210 \$68.4 \$68.4 0 \$99 135 \$9,950 \$9,950 \$73.7 \$73.7 0 \$116

3. Based on your calculations in completing the table in Question 2, what is this manufacturer’s minimum cost output level? Explain your answer.

Minimum cost level is the lowest point of Average Total Cost curve. The MC crosses the ATC curve at the lowest point, which gives the minimum cost output level.

In the table above, the lowest ATV is \$61.40, which corresponds to an output of 90.

Minimum cost output is 90 cell phones

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.

The scenario favors diminishing returns effect. When the output is large, the variable input required to produce an additional unit is greater. It leads to a higher Average Variable Cost, where, ATC=AVC+AFC. The spreading effect and the diminishing returns effect are wholly a result of producing an additional unit (Krugman, 2015).

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.

The spreading effect is support in this scenario. The larger the output, the larger the output over which fixed cost is spread. It leads to lower Average Fixed Costs. Also, ATC=AVC+AFC.

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Reference:

Krugman, P. R. (2015). Microeconomics (4th ed.). New York, NY: Worth.

 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. a. – Explain why the average total cost of 11th Gizmo is \$18. 7% 2.80

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