A firm is producing 1,000 units of a good and the total cost of production is $4 million. $1

million in costs go to fixed factors like buildings, insurances, and operating licenses. The

remaining $3 million goes to workers and suppliers.

a) Using the numbers provided, calculate the average total cost, the average fixed cost, and

the average variable cost?

b) Explain what is meant by marginal cost?

c) If the marginal cost for the firm of producing 1,000 units is $2,500, what has been

happening to the average variable cost? Has it been increasing, decreasing, or staying the

same?

In order to determine _____, the firm's total cost must be divided by the quantity of its output.

A) fixed cost

B) average cost

C) diminishing marginal returns

D)variable cost

A corporation is trying to raise money for a business expansion. The total cost of the expansion is $1,000,000. The expected return on assets before taxes of the business expansion project is 10% on the total asset investment. (Expected probabilities of returns are .25 of an 8% return, .5 of a 10% return and .25 of a 12% return.)

After the privately held corporation owners are considering two options which involve obtaining one of two types of loans from an area bank. The current individual stock investors will put in the needed additional equity investment capital for the expansion project.

Loan option 1: The bank is willing to lend 60% of the $1,000,000 project with a 7 year interest only loan at an annual contract rate of 8% with interest payable quarterly and a balloon note payment at the end of 7 years. The loan closing costs will be 4% of the amount borrowed and the owners will be held personally responsible for the loan. The closing costs fees must be paid in cash when the loan contract is signed and begins.

Loan option 2: The bank is also willing to lend 70% of the $1,000,000 project with a 7-year interest only loan at an annual contract rate of 9% with interest payable quarterly and a balloon note payable at the end of 7 years. The loan closing cost is 5% of the amount borrowed and the owners will also be held personally responsible for the loan. The set up fees must be paid in cash when the loan contract is signed and begins.

To assist in this financial decision making situation, calculate the follow:

What is the APR for each loan?  

Option 1 _________                      

Option 2 ___________

If Option 2 is selected, what is the incremental cost of borrowing the additional amount of money?

Incremental Cost of Borrowing ________________%

What is the expected return on investment for this business expansion project for each option of financing this expansion project?

ROE if Option 1 is used? __________                                      

ROE if Option 2 is used? ___________________

Which option do you recommend and why?  

A firm faces the demand schedule as ? = 660 − 3?
and the total cost schedule as
?? = 6?^3 − 72?^2 + 240? + 25. Please answer the followings:
a. Does the above cost function satisfy the parametric restrictions we derived in the class?
b. What is the maximum profit the firm can make? Confirm your results with second order
conditions as well.

1. What is average total cost (ATC)? Why is that important to a firm?
2. If you were manager of In and Out Burger, how would you calculate the marginal cost of producing one more burger?
3. If you were a manager of In and Out Burger, how would you calculate the cost per burger produced? (of the average total cost per burger)?
4. Why in the short run, does marginal cost rise as more units are produced?
5. What is the long run production decision?
6. What are economies of scale? (Does it pay to get bigger in size?)
7. What are diseconomies of scale?

marginal revenue equals marginal cost to maximize total revenue

8.         A variable cost

            a.   decreases in total with increases in volume

            b.   increases on a per-unit basis with increases in volume

            c.   increases in total with increases in volume

            d.   decreases on a per-unit basis with increases in volume

            e.   None of the above

9.   In standard costing, the upper and lower control limits are used to determine

            a.   the direction of the variance

            b.   the dollar amount of the variance

            c.   whether or not to investigate a variance

            d.   All of the above

            e.   None of the above

10. The direct materials usage variance is part of the performance evaluation of the

            a.   production manager

            b.   sales manager

            c.   purchasing agent

            d.   controller’s office

            e.   None of the above

11. Volume variances are generally the responsibility of the

            a.   purchasing agent

            b.   production manager

            c.   sales manager

            d.   controller’s office

            e.   None of the above

12. When using variable costing,

            a.   all fixed costs are deducted on the variable costing income statement

            b.   the total cost of goods sold is deducted on the variable costing income statement

            c.   the cost allocated to ending inventory consists of both fixed and variable costs

            d.   the total contribution margin on the variable costing income statement is based on units produced

            e.   None of the above

13. According to GAAP, if the ending balance in the overhead control account is considered immaterial,

            a.   it is closed to direct materials, work-in-process, and finished goods

            b.   it is closed to work-in-process, finished goods, and cost of goods sold

            c.   it is closed to finished goods and cost of goods sold

            d.   the total is closed to cost of goods sold

            e.   None of the above

14. According to the IMA’s Statement of Ethical Professional Practice, an accountant must “Disclose all relevant information that could reasonably be expected to influence an intended user's understanding of the reports, analyses, or recommendations.” This falls under the category of

            a.   Competence

            b.   Confidentiality

            c.   Integrity

            d.   Credibility

            e.   None of the above

15. The margin of safety is

            a.   the amount of revenue earned (or expected to be earned) above the break-even point

            b.   the amount of revenue earned (or expected to be earned) above total fixed costs

            c.   the amount of revenue earned (or expected to be earned) above total costs

            d.   the amount of revenue earned (or expected to be earned) above total variable costs

            e.   None of the above

Production quantity and the total cost of production are given in the form of a table.

1. Determine the total cost production for (i) 2500 tons (ii) 4500 tons
2. If the total production cost is Rs. 50,000, then how many quantities were produced?

A transport company is studying the total cost of operations. It is assumed that the costs are driven mainly by the kilometres covered. Data for the past four months is shown here:

a) What is the relevant range for the company operations?

b) Using the high-low method, estimate the company's variable cost per kilometre