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Lecture Chapter5

An improvement in productivity at Tuma Unlimited has caused its average total costs, marginal costs, and average variable costs to decrease while average fixed costs remain unchanged. Productivity improvements reduce the variable costs of production per unit without affecting fixed costs like rent and insurance, leading to lower average and marginal costs.

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Angelica Joy Manaois
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51 views4 pages

Lecture Chapter5

An improvement in productivity at Tuma Unlimited has caused its average total costs, marginal costs, and average variable costs to decrease while average fixed costs remain unchanged. Productivity improvements reduce the variable costs of production per unit without affecting fixed costs like rent and insurance, leading to lower average and marginal costs.

Uploaded by

Angelica Joy Manaois
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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MODULE MANAGERIAL ECONOMICS

CHAPTER 5: Production and Cost

Objectives:
a. Understand the theory of production
b. Explain the cost of choices and trade-offs

Let’s Exercise!

Tuma Unlimited produces noodles in a perfectly competitive market. Its average total costs,
marginal costs, and average variable costs have all decreased, but its average fixed costs
haven't changed.

Which of the following would cause these changes?

Choose 1 answer:

(Choice A)
A
an improvement in productivity

(Choice B)
B
an increase in fixed costs

(Choice C)
C
a tax on variable costs
(Choice D)
D
a subsidy on fixed costs

(Choice E)
E
a tax on fixed costs

For more knowledge please check the links provided;

https://www.youtube.com/watch?v=ucJBO9UTmwo

https://www.youtube.com/watch?v=qYKJdooEnwU
MODULE MANAGERIAL ECONOMICS
The cost of production is an important factor in almost all business analysis and decision,
etc..cost refers to the expenses incurred in production.

Cost analysis

Cost analysis refers to the study of behavior of cost in relation to one or more production criteria
like size of output, scale of operation, price of factors of production

Break-even analysis

There are two basic types of costs a company incurs.

• Variable Costs

• Fixed Costs

Variable costs are costs that change with changes in production levels or sales. Examples
include: Costs of materials used in the production of the goods.

Fixed costs remain roughly the same regardless of sales/output levels. Examples include: Rent,
Insurance and Wages

TOTAL COSTS

- Total Costs is simply Fixed Costs and Variable Costs added together.
TC = FC + VC
- As Total Costs include some of the Variable Costs then Total Costs will also change
with any changes in output/sales.

The Break-even point occurs when Total Costs equals Revenue (Sales Income)

Revenues (Sales Income) = Total Costs


MODULE MANAGERIAL ECONOMICS
At this point the business is not making a Profit nor incurring a Loss – it is merely covering its
Total Costs

Let us have a look at a simple example.

Bannerman Trading Company opens a flower shop.

Fixed Costs:

 Rent: £400
 Helper (Wages): £200

Variable Costs:

 Flowers: £0.50 per bunch


 Selling Price: • Flowers: £2 per bunch

So we know that:

 Total Fixed Costs = £600


 Variable Cost per Unit = £0.50
 Selling Price per Unit = £2.00

SP = £2.00
VC = £0.50
FC = £600
We must firstly calculate how much income from each bunch of flowers can go towards
covering the Fixed Costs.

This is called the Unit Contribution.

Selling Price – Variable Costs = Unit Contribution


£2.00 - £0.50 = £1.50
For every bunch of flowers sold £1.50 can go towards covering Fixed Costs

Now to calculate how many units must be sold to cover Total Costs (FC + VC)

SP = £2.00
VC = £0.50
Unit cont = £1.50
FC = £600
This is called the Break Even Point

Break Even Point = Fixed Costs Unit Contribution


£600 £1.50 = 400 Units
Therefore 400 bunches of flowers must be sold to Break Even – at this the point the business is
not making a Profit nor incurring a Loss – it is merely covering its Total Costs

For more knowledge please check the link provided;

https://www.youtube.com/watch?v=UWImfFax8Ew

https://www.slideshare.net/nethanp/cost-of-production-managerial-
economics
MODULE MANAGERIAL ECONOMICS

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