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Fixed Costs, Variable Costs and Economies of Scale

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Can you please help me with the following scenario?

Your rich uncle died and left you $100k, which you decided to use for your own internet business. What business will you go into, and what will comprise your fixed and variable costs? How could your business take advantage of economies of scale?

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Solution Preview

Suggested business: $100,000 would be enough to start a modest Internet Café business

Target Market: Students, Office workers,

Suggested Services:

Online gaming
Surfing, chatting and emailing
Scanning
Printing
Typing, CD/DVD burning services
Computer rental

Location:

Do not construct a building for your business. As a starter, rent a place. Find a location where rent is cheap.

The café must be near business establishments, offices and schools

Wireless Broadband Internet Connection:

Ideal internet connection should at least be 1 mbps. Speed greater than 1 mbps is preferred but costs higher.

Tables and ...

Solution Summary

This a suggested business venture involving start-up capital of $100,000 which specifies the fixed and variable costs including the concept of economies of scale.

$2.19
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Degree of Operating Leverage

Degree of Operating Leverage. Untouchable Package Service (UPS) offers overnight package delivery to Canadian business customers. UPS has recently decided to expand its facilities to better satisfy current and projected demand. Current colume totals two million packages per week at a price of $12 each, and average variable costs are constant at all output levels. Fixed costs are $3 million per week, and profit contribution averages one-third of revenues on each delivery. After completion of the expansion project, fixed costs will double, but variable costs will decline by 25%.
A. Calculate the change in UPSâ??s weekly breakeven output level that is due to expansion.
B. Assuming that volume remains at two million packages per week, calculate the change in the degree of operating leverage that is due to expansion.
C. Again, assuming that volume remains at two million packages per week, what is the effect of expansion on weekly profit?
D. Define economies of scale. How does this relate to returns to scale? Cite and briefly discuss the main determinants of economies of scale.

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