Question

A company produces gold picture frames. The cost per picture frame is:

Materials                                               $9

Packaging                                             $1

Decorations on the frame                       $5

Shipping and handling                           $1.5

Each worker earns $30,000 annually in salary and benefits. The number of workers changes based on the level of production. This means this is a variable cost.

The artist who creates the designs on the picture frames is paid $25,000 annually. Senior management are paid a total of $200,000 annually. Other annual costs are:

Taxes and Insurance                                          $17,000

Utilities                                                              $50,000

Rent                                                                $300,000

Miscellaneous Overhead Expenses                     $24,000

The following production is possible:

No. Of Workers	0	1	2	3	4	5	6	7
No. Of Picture Frames that can be made	0	12,000	21,000	35,000	50,000	65,000	73,000	71,000

1. Using all this information complete the following table and answer the questions. It would be easier if you set this up in an Excel spreadsheet. When you are done, you must submit it as a Word document with your answers. You will use this table to answer questions 2 and 3.

Your first step is to identify which are fixed costs and which are variable costs. If you will have to keep paying the cost whether you produce 0 units of the product or 10,000 units, then it is a fixed cost. In the short run you have to keep paying it. In the long run you may be able to change these fixed costs. A variable cost changes based on how much of the product you produce. But the variable costs may not change all at the same time.

# of workers	Q	TVC	AVC	AFC	TC	ATC
			TVC / Q	FC / Q	FC + VC	TC/Q
0	0
1	12000
2	21000
3	35000
4	50000
5	65000
6	73000
7	71000

MC

∆TC / ∆Q

2. What is the lowest price you would be willing to start producing this new product? Be precise. Don’t round up to the nearest dollar. (1 mark)
3. If you were already committed to the fixed costs, how low could the price per picture frame fall before you would consider shutting down production? Remember, in the SHORT RUN, you have to keep paying your fixed costs whether you produce any picture frames or not. If you can cover your variable costs, then anything over that will reduce your fixed costs. You may be losing money in the short run but you are losing less money. (1 mark)

Answer 1

Total Variable costs = materials(9) + packaging(1) + decorations on the frame(5) + shipping(1.5) + workers salary

=16.5+ workers salary depending upon the production

Total fixed costs = Artist salary(25000) + Management salary(200000) + Taxes(17000) + Utilities(50000) + Rent(300000) + Overhead expenses(24000)

=616000

Note :-

1)Artist salary is included in fixed cost because it is a permanent employee and is not employed according to the demand of the frames therefore it is considered as a fixed cost.

2) Variable cost is calculated as per production. For ex - (16.5*12000)+(1*30000)=228000

Number of workers	Q	TVC	AVC	AFC	TC	ATC	MC
0	0	0		-	-	-	-
1	12000	228000	19	51.33	844000	70.33	70.33
2	21000	406500	19.36	29.33	1022500	48.69	19.83
3	35000	667500	19.07	17.6	1283500	36.67	18.64
4	50000	945000	18.9	12.32	1561000	31.22	18.5
5	65000	1222500	18.81	9.48	1838500	28.28	18.5
6	73000	1384500	18.97	8.43	2000500	27.40	20.25
7	71000	1381500	19.46	8.68	1997500	28.13	1.5