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Costs of machine tool manufacturer

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Assume you own a machine tool manufacturing company that produces one standardized type of tool. Your total costs change as shown in the table below:

Costs of machine tool manufacturer

(1)
Quantity (thousands of machine tools per day) (2)
Total Cost
(TC)
(thousands of dollars per day) (3)
Average Cost
(ATC)
(dollars per machine tool) (4)
Marginal Cost
(MC)
(dollars per machine tool)
0 $0 $ $
1 5
2 20
3 60

1. Fill in the rest of the columns in the cost table above.

2. Graph the average and marginal costs curves for the firm. You can use the graph area below.

$48

42
36
32
24
18
12
6
0 1 2 3 4

3. Your machine tool firm is characterized by which of the following market conditions:
a. Economies of scale
b. Constant returns to scale
c. Diseconomies of scale
d. None of the above, the cost information is applicable to only the short run.

4. Explain your answer in #3.

5. Explain why the free rider problem occurs for public goods but not for private goods. Give an example of a free rider public good.

6. Consider a trout stream that is threatened with destruction by a nearby logging operation. Each of the 10,000 local fishers would be willing to pay $5 to preserve the stream. The owner of the land would incur a cost of $20,000 to change the logging operation to protect the stream.

a. Is the preservation of the stream efficient from the social perspective? Why or why not?

b. If the landowner has the right to log the land any way he wants, will the stream be preserved? Why or why not?

c. What would be your solution to the problem and describe a transaction that would benefit the fisher and the landowner.

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Solution Summary

Costs of machine tool manufacturer problem is depicted step-by-step.

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Break-Even Point Questions for Flecker Vending and Morgan Tool

Using an Excel spreadsheet (see attached file), complete Problems 1 & 2 below.

Problem 1 - Flecker Vending Company

Flecker Vending Company operates and services snack vending machines located in restaurants, gas stations, and factories in four northwestern states. The machines are rented from the manufacturer. In addition, Flecker must rent the space occupied by its machines. The following expense and revenue relationships pertain to a contemplated expansion program of 45 machines.

Fixed monthly expenses follow:

Machine rental: 45 machines @ $46.50 $2,093
Space rental: 45 locations @ $25.00 1,125
Part-time wages to service the additional 45 machines 1,200
Other fixed costs 350
Total monthly fixed costs $4,768

Other data follow:
Per Unit Per $100 of Sales
Selling price $1.00 100%
Cost of snack .75 75
Contribution margin $ .25 25%
Required:

These questions relate to the above data unless otherwise noted. Consider each question independently.

1. What is the monthly break-even point in number of units? In dollar sales?

2. If 30,000 units were sold, what would be the company's net income?

3. If the space rental cost were doubled, what would be the monthly break-even point in number of units?
In dollar sales?

4. If, in addition to the fixed rent, Delgado Food Services Company paid the vending machine manufacturer $.02 per unit sold, what would be the monthly break-even point in number of units? In dollar sales? Refer to the original data.

5. If, in addition to the fixed rent, Delgado paid the machine manufacturer $.04 for each unit sold in excess of the break-even point, what would the new net income be if 30,000 units were sold? Refer to the original data.

Problem 2 Morgan Tool Company

Chico Ruiz, president of Morgan Tool Co., has asked for information about the cost behavior of manufacturing support costs. Specifically, she wants to know how much support cost is fixed and how much is variable. The following data are the only records available:

Month Machine Hours Support Costs
May 900 $ 9,200
June 1,350 12,500
July 990 8,000
August 1,250 11,000
September 1,800 14,000
Required:

1. Find monthly fixed support cost and the variable support cost per machine hour by the high-low method.

2. Explain how our analysis for Requirement 1 would change if new October data were received and machine hours were 1,700 and support costs were $15,800.

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