Question

1. Two plants can produce drone aircraft. Plant #1 has a fixed startup cost of $33.15M before the first unit rolls off, and plant #2 has an initial fixed cost of $40.5M. Their marginal costs (MC) for producing 1-20 units are below.

# Drones	Plant 1 MC ($M)	Plant 2 MC ($M)
1	7.5	12.06
2	6.75	11.16
3	5.25	10.1
4	4.95	8.1
5	4.5	6.18
6	4.5	4.92
7	4.5	3.12
8	4.65	2.99
9	4.8	2.83
10	5.25	2.7
11	6	2.52
12	6.6	2.3
13	7.2	2.1
14	9	1.92
15	10.05	1.92
16	12	2.9
17	13.95	3.2
18	18.3	6.4
19	22.5	8.2
20	30	12.6

Use the data to compute Average Fixed Cost (AFC), Average Variable Cost (AVC) and Average Total Cost (ATC) as a function of the rate of output.

a) Plot the MC, AFC, AVC and ATC curves for both plants.

b) Use ATC to decide the best plant option for a 5 unit order and the best choice for a 20 unit order.

c) Describe briefly the sources of fixed costs vs. variable costs for producing drone aircraft in a facility.

Answer 1

Formulas using excel

TC = MC + TCn-1

VC = TC - Fixed Cost

AVC = VC/Q

ATC = TC/ Q

AFC = FC/ Q

Drones	Plant 1 MC ($M)	TC	FC	VC	AVC	AFC	ATC	Plant 2 MC ($M)	TC	FC	VC	AVC	AFC	ATC
		33.15	33.15						40.50	40.50
1	7.50	40.65	33.15	7.50	7.50	33.15	40.65	12.06	52.56	40.50	12.06	12.06	40.50	52.56
2	6.75	47.40	33.15	14.25	7.13	16.58	23.70	11.16	63.72	40.50	23.22	11.61	20.25	31.86
3	5.25	52.65	33.15	19.50	6.50	11.05	17.55	10.10	73.82	40.50	33.32	11.11	13.50	24.61
4	4.95	57.60	33.15	24.45	6.11	8.29	14.40	8.10	81.92	40.50	41.42	10.36	10.13	20.48
5	4.50	62.10	33.15	28.95	5.79	6.63	12.42	6.18	88.10	40.50	47.60	9.52	8.10	17.62
6	4.50	66.60	33.15	33.45	5.58	5.53	11.10	4.92	93.02	40.50	52.52	8.75	6.75	15.50
7	4.50	71.10	33.15	37.95	5.42	4.74	10.16	3.12	96.14	40.50	55.64	7.95	5.79	13.73
8	4.65	75.75	33.15	42.60	5.33	4.14	9.47	2.99	99.13	40.50	58.63	7.33	5.06	12.39
9	4.80	80.55	33.15	47.40	5.27	3.68	8.95	2.83	101.96	40.50	61.46	6.83	4.50	11.33
10	5.25	85.80	33.15	52.65	5.27	3.32	8.58	2.70	104.66	40.50	64.16	6.42	4.05	10.47
11	6.00	91.80	33.15	58.65	5.33	3.01	8.35	2.52	107.18	40.50	66.68	6.06	3.68	9.74
12	6.60	98.40	33.15	65.25	5.44	2.76	8.20	2.30	109.48	40.50	68.98	5.75	3.38	9.12
13	7.20	105.60	33.15	72.45	5.57	2.55	8.12	2.10	111.58	40.50	71.08	5.47	3.12	8.58
14	9.00	114.60	33.15	81.45	5.82	2.37	8.19	1.92	113.50	40.50	73.00	5.21	2.89	8.11
15	10.05	124.65	33.15	91.50	6.10	2.21	8.31	1.92	115.42	40.50	74.92	4.99	2.70	7.69
16	12.00	136.65	33.15	103.50	6.47	2.07	8.54	2.90	118.32	40.50	77.82	4.86	2.53	7.40
17	13.95	150.60	33.15	117.45	6.91	1.95	8.86	3.20	121.52	40.50	81.02	4.77	2.38	7.15
18	18.30	168.90	33.15	135.75	7.54	1.84	9.38	6.40	127.92	40.50	87.42	4.86	2.25	7.11
19	22.50	191.40	33.15	158.25	8.33	1.74	10.07	8.20	136.12	40.50	95.62	5.03	2.13	7.16
20	30.00	221.40	33.15	188.25	9.41	1.66	11.07	12.60	148.72	40.50	108.22	5.41	2.03	7.44

Answer a)

Answer b)

For the selection of orders of drones, ATC should be minimum.

For 5 unit order - the Best choice would be Plant 1 as ATC is $12.42M which is less than Plan 2 (ATC = $17.62M)

For 20 unit order - the Best choice would be Plant 2 as ATC is $7.44M which is less than Plan 1 (ATC = $11.07M)

Answer c)

Sources of fixed costs for producing drone aircraft in a facility are aircraft financing, purchasing of books, charts, and materials, registration fees, insurance, mapping, pieces of machinery, smartphone parts, investments and one-man Aerial Film Unit (Filmmaking).

Sources of variable costs for producing drone aircraft in a facility are supplies, labor, and sales commissions.