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    Production and Cost Analysis

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    SLP Assignment Readings
    Required Reading
    Links to Cost Analysis
    gordonhensley (2012, July 18.) Cost Analysis Lecture [Video file]. Retrieved from https://www.youtube.com/watch?v=SUberLlz0Us

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    The purpose of this paper is to explain the relationships between total cost, output, and the price of labor and capital, as well as how they can be used to guide a manager's decisions. Costs are an underlying imperative for a manager who has to make business decisions. For example, a change in production output could cause certain costs to increase or decrease while having no effect on other costs. These changes in costs can be predictable if we understand the nature of the cost. Examples illustrating how prices of inputs affect managerial decisions in the current market for fuel will be provided. The examples will also discuss the implications for corporate profits.

    Fixed costs are costs that are the same in total, but which vary for each unit as production output changes. Examples of fixed costs include costs incurred by a plant, such as
    • Rent
    • Depreciation of a building
    • Salaries of plant managers
    • Insurance
    • Property taxes (1)

    In contrast, variable costs remain constant in terms of the cost per unit, but changes proportionally as production output changes. Examples of variable costs include
    • Direct materials
    • Price of labor, paid based on a per unit basis
    • Plant supplies
    • Electricity used to operate machinery or equipment (1)

    Capital is typically used in the purchase of buildings and equipment, which are both fixed costs. Total cost consists of both fixed costs and variable costs. As production output increases, total cost usually increases as well due to the increase in total variable costs to produce the increased quantity of product. The average total cost, however, is expected to decrease initially, then increase, forming a U-shaped curve. Initially, as the ...

    Solution Summary

    The expert examines production and cost analysis. Answered in 1054 words with seven references are cited.