Question

Imagine that you are the owner of a cookie factory. In your first paragraph, provide examples of four production costs of your cookie factory. Which costs are fixed costs? Which costs are variable costs? In your second paragraph, provide two examples of business decisions that are affected by your costs. Clearly justify your answer.

Answer 1

4 production costs of the cookie factory are

1) Raw material cost of making the cookies : VARIABLE COST

2) Labour cost for the workers making the cookies : FIXED COST

3) Capital cost for building the plant : FIXED COST

4) Packaging cost for packing the cookies : VARIABLE COST

2 major business decisions that are affected by the costs are

1) Pricing decision: Depending on the costs, the pricing decision has to be taken to ensure that the company does not face a loss. The price should be at least more than the total variable cost. The difference between price and total variable cost contributes towards the fixed cost

2) Quantity Production: The difference between the price and the total variable cost contributes towards reducing the fixed costs. So if the difference between the price and the total variable cost is low, the volume needs to be high to cover the fixed cost. Thus it is low margin and high volume product. If the difference is high, low volumes can cover the fixed cost. This is high margin low volume product. Thus depending on the costs and then the price, the quantity to be produced is decided.

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