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Determining economic and accounting cost functions

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Two graduate business students are considering opening a full-service car wash in Greenville, North Carolina, after graduation. This is an alternative to employment with a local manufacturing firm where they would each earn $70,000 per year. A fully equipped facility can be leased at a cost of $35,000 for the year. Additional projected costs are $15,000 for overhead, and $5 per automobile for materials and supplies. Full detail automobile cleaning would be priced at $25.

A.What is the accounting cost function for this business?
B.What is the economic cost function for this business?
C. What is the economic break even number of units for this operation? (Assume a $25 price and ignore interest costs associated with the timing of the lease payments.)

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Solution Preview

A. What is the accounting cost function for this business?

Variable cost per automobile cleaning=V=$5
Fixed Costs=F=lease cost+ projected overheads=35000+15000=$50000
Accounting cost function=F+V*Q=50000+5Q
Where, Q is number of automobiles cleaned per year.

B. What ...

Solution Summary

Solution describes the steps to determine accounting and economic cost functions. It also calculates economic break even units for the given operation.

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