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Marginal Cost, Total Fixed Product, and More

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1. ABC Manufacturing Company provided you with the following production data for the month of January. Complete the table:

Units of Labor Total Output Average Product Marginal Product
0 0

1 200

2 450

3 660

4 840

5 940

2. Armel consumes two commodities only, meat and potato. His marginal utility of a unit of meat is 300 and each unit is purchased at $5. Marginal utility of a unit of potato for Christopher is 50 and the cost of each unit is 10.
a) Does Hamid consume an optimal combination of the two commodities? Why?
b) What do you recommend to him?

3. Assume that the last dollar invested in labor provides you with $30 of revenue while the last dollar invested in capital yield $100. If capital has a unit cost of $20 and labor costs $6 per unit, are you using your resources in the best possible combination? What should you do?

4. Quantity of output (Q) and Total Cost (TC) for Saghar Incorporated is given in the table below. Complete the table where TFC = Total Fixed Cost; TVC = Total Variable Cost; AVC=Average Variable Cost; AFC=Average Fixed Cost; and MC=Marginal Cost.

Q TC TFC TVC AVC AFC MC
0 200
1 250
2 290
3 320
4 380
5 500

5. Vanegas Manufacturing Inc. has the following data regarding its costs and production for last week.

UNITS OF OUTPUT TOTAL COST
0 $200
1 $260
2 $310
3 $350
4 $420
5 $510

Use the data to calculate following:
a) Total fixed costs
b) Total variable cost of producing 5 units
c) Average variable cost of producing 3 units
d) Marginal cost of the third unit
e) Average fixed cost of producing 4 units
f) Total cost of producing 4 units.

6. BizWiz Corporation has observed the following data for the last week of operation. Where P = price and Q = quantity. Calculate total revenue (TR), marginal revenue (MR), and average revenue (AR) for Bijan Corporation's last week of operation.

Q P TR MR AR
0 $100

1 $90

2 $80

3 $70

4 $60

5 $50

7. Jamie, the new CEO of the City Hospital wants to utilize her hospital room's staff in a manner that leads to the least cost combination. The room's staff may be divided into two distinct categories, Registered Nurses and Nurses' Assistants. Assume that the cost of a Registered Nurse is $50 per hour while a Nurse Assistant costs $15 an hour. The marginal productivity of the staff is measured by the amount generated for the hospital per hour. Currently the marginal productivity of a Registered Nurse is $200 while that of a Nurse Assistant is $45.

a) Is the current mix of operating room's medical staff optimal? Why?
b) What do you recommend to the hospital CEO?

8. Last Friday night you spend all your daily income on Steak and Ale. The marginal utility of the Stake to you was 600 utils and it cost $25. The last glass of Ale you drank cost you $5 and gave you 100 utils. Is your consumption at its optimal level? What should you do?

9. Five years ago, Marzi started a small manufacturing company. Last weekend she was reviewing the company's operational and financial data. She noticed that during the past five years the volume have been growing steadily. Average total and average variable costs, however, have declined during the first three years of operation and sharply increased thereafter. Not knowing economics, Marzi was unable to explain her findings. Explain the outcome to her and recommend a course of action based on these findings.

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The following posting helps with problems involving marginal cost, total fixed product and more.

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Cost Volume Profit Case Study

Rusty casting makes two cast iron products: man hole covers and sewer grates.
His accountant provided a income statement but Rusty needs
more information to make some business decisions.

Using the financial data provided, please do the following:

1. Determine the expense type for each expense on Rusty's income statement (see tab ExpType)

2. Prepare an Income Statement using the Contribution Margin format separating expenses into four categories:
Direct variable product expenses
Indirect variable product expenses
Indirect fixed product expenses
Fixed General and Administrative expenses

3. Using the same format, prepare a product income statement by allocating Variable Indirects and Fixed Indirects between covers and grates. Use direct labor to allocate these expenses (see tab ByLabor).

4A. Calculate how Variable and Fixed indirects would have been allocated using revenue and using units produced (do on ByRev and ByUnits tabs). Which allocation method do you think is best?
4B. Knowing that the bonuses for the Grate Production Manager and Covers Production Manager are 5% of their product's margin, how will you justify your recommendation to them?
4C. If you decided to do multiple cost pools for indirects. What pools might you use and what expenses would they contain? What carrier would you use for each pool in order to allocate out the indirects?

5. Calculate the predetermined overhead rate if indirects are allocated using direct labor. Also, calculate the POR if using units to allocate indirects.
6. Determine the impact of the following scenarios:

6A. What is Rusty's break even in units and $?
6B. What is Rusty's margin of safety in units and $? What is his margin of safety ratio?
6C. How much would net income increase if Rusty sells 10,000 more covers?
6D. How much would net income increase if Rusty sells 10,000 more grates?
6E. Rusty has been offered an special order for 20000 more grates,
but it's at a lower price ($55.00 instead of $65.00) and he would have
to rent more factory space at a total cost of $80,000.
E1. How much would net income change if he accepted the order?
E2. What would be some reason to accept the order? Some reasons
not to accept it? What would you recommend?

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(See attached file for full problem description)

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