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Production Costs for General Motors

Use GM (General Motors) as an example, explain variable, fixed, average, marginal, and total cost of production. Explain the conditions that exist when they shutdown their operations, and the conditions that exist when they resume their operations.

Solution Preview

As General Motors manufactures automobiles, they incur a variety of costs in their operations. Variable costs are those costs that vary with production. For example, as GM assembles an SUV, it installs components including windshields. Let's assume that a windshield costs the plant $50. This expense is a variable cost since if the plant stopped producing, it wouldn't incur the cost. However, with each SUV that rolls down the line, the plant will incur a $50 variable cost for each windshield it installs. This cost varies with production levels as well. If the plant builds 100 SUV's one day, it will incur $50 x 100 or $5,000 in variable costs directly from the windshields. If it only produces 10 SUV's one day, it will incur $50 x 10 or $500 in variable costs from the windshields. Variable costs include all direct materials (including windshields, tires, etc.), direct labor (factory ...

Solution Summary

The solution explains variable, fixed, average, marginal, and total production costs for General Motors (GM).

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