Assignment In This Assignment You Will Define And Calculate

Assignmentin This Assignment You Will Define And Calculate The Remain

In this assignment, you will define and calculate the remaining six major cost elements of a business, given the Total Costs and the Quantity Produced. You will also use the computed costs to determine a minimum cost output level for the business. Additionally, you will explain how the Average Total Cost at 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:
   • Fixed Costs (FC)
   • Variable Costs (VC)
   • Average Variable Costs (AVC)
   • Average Total Costs (ATC)
   • Average Fixed Costs (AFC)
   • Marginal Costs (MC)
2. Using Table 1, which shows hourly production and Total Cost estimates for a new manufacturing firm wishing to enter the smartphone market, fill in the blank cells in columns a., b., c., d., and e. by computing the appropriate values:
   • Total Cost (TC)
   • Variable Costs (VC)
   • Average Variable Costs (AVC)
   • Average Total Costs (ATC)
   • Average Fixed Cost (AFC)
3. Based on your calculations in Question 2, determine the manufacturer’s minimum cost output level and explain your reasoning.
4. According to textbook explanations (page 341), when an additional unit is produced, two factors—the Spreading effect and the Diminishing Returns effect—impact the change in average total costs. In the following situations, explain how each factor causes differences in average total costs:
   • Production of the 10th Gizmo resulted in an ATC of $20, but production of the 11th Gizmo increased the ATC to $22.
   • Production of the 10th Gizmo resulted in an ATC of $20, but production of the 11th Gizmo decreased the ATC to $18.

Paper For Above instruction

The exploration of cost elements and their implications for business operations is fundamental in microeconomics, particularly in understanding how firms make decisions about production levels and cost management. This paper delves into the methods for calculating major cost components, determines the minimum cost output level, and explains the effects of production on average total costs with considerations of the spreading and diminishing returns effects.

Calculating Cost Elements

When total costs are known, the fundamental step is to decompose these costs into fixed and variable components. Fixed costs (FC) are expenditures that do not change with the level of output in the short run, such as rent, salaried labor, and insurance. They can often be inferred by subtracting total variable costs from total costs at a given output level. Variable costs (VC) change directly with the quantity produced, including raw materials and direct labor costs proportional to output.

The average variable cost (AVC) is obtained by dividing total variable costs by the quantity produced, illustrating the variable cost per unit. Similarly, the average total cost (ATC) is derived by dividing total costs by the quantity, representing the total cost per unit of output. The average fixed cost (AFC) reflects fixed costs spread over the output, calculated as fixed costs divided by quantity. Marginal cost (MC), which is the cost of producing one additional unit, is derived from the change in total costs when output increases by one unit, or from the change in variable costs per additional unit.

Applying Cost Calculations to a Manufacturing Scenario

Using the provided table data for a firm entering the smartphone market, calculations proceed as follows. For example, if total costs at zero production are known, these include fixed costs, as variable costs are zero at no output. As production increases, variable costs rise proportionally or otherwise, affecting total costs. Filling in blank cells involves appropriate calculations: subtracting total costs at consecutive levels to find marginal costs, dividing variable costs by units produced to find AVC, and so on.

Determining the minimum cost output involves identifying the production level where average total costs are minimized, indicating the most efficient scale of operation. This involves examining the computed ATC values across different output levels and finding the lowest point.

Effects of Production on Average Total Cost

The effects of producing additional units affect the ATC through the spreading effect and the diminishing returns effect. The spreading effect refers to how fixed costs are spread over more units, which tends to lower ATC as output increases, up to a point. Conversely, diminishing returns set in when each additional unit produces less additional output, causing variable costs per unit to rise, which increases ATC beyond a certain level.

In the first scenario, the increase in ATC from $20 to $22 upon producing the 11th Gizmo indicates the diminishing returns effect, where additional units are less efficient. The fixed costs are spread over more units, but the rising variable costs per unit outweigh this benefit. In the second scenario, the decrease in ATC from $20 to $18 upon producing the 11th Gizmo demonstrates the spreading effect dominating, whereby fixed costs are more effectively spread, reducing the average total cost despite diminishing returns.

Conclusion

Understanding the calculations of fixed, variable, and marginal costs is essential for effective business decision-making. Recognizing how production levels influence average total costs enables firms to optimize output and maximize efficiency. The interplay of the spreading and diminishing returns effects significantly shapes the cost structure, with strategic implications for production scheduling and scaling operations.

References

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