Production and Cost Relationships Essay Example | Topics and Well Written Essays - 1500 words

Production and equal Relationships - Essay ExampleProfit is measured as the difference between the revenue generated deducted with the bells incurred. Thus, in straddle to maximize profits, the company could either ensure that it is generating the highest revenue possible by increasing scathe and quantity demanded or minimize the costs that it incurs (Pindyck and Rubinfeld 2005). This paper will focus on the latter. The following chapters will look at the relationship of average cost, fringy cost, and marginal product in the aim of helping a phone line organization attain its goal of profit maximization.In the course of its operation, a business organization incurs various costs in order to ensure that products are designed, manufactured, and distributed to customers (Cepeda 2005). In order to understand average tote up cost, it is best to have a comprehension of what comprises the list cost that a business organization faces. In general, the company is faced with two differe nt costs which make up its total cost namely primed(p) cost and variable cost (Brue and McConnell 2005). Fixed cost, as the name implies is fixed and does not vary with the take aim of payoff. An example of fixed cost is the payment for rent of production plant or retailing store. On the other hand, variable costs are those costs which changes when the quantity of production is changed (Cepeda 2005). Examples of these are the cost of materials and labor which are needed in the production of one unit of a product. The sum of the total fixed cost and the total variable cost is the total cost. Dividing the total cost with the number of quantity produced by the business organization will yield the average total cost (Brue and McConnell 2005).Table 1. Numerical Example for Average Total CostQuantityTotal Fixed CostTotal Variable CostTotal CostAverage Total Cost50$600$1250$1850$37100$600$2500$3100$31150$600$3750$4350$29200$600$5000$5600$28250$600$6250$6850$27.4300$600$7500$8100$27In or der to illustrate fixed cost, it is best to come up with a numerical example. Suppose that a company manufactures figurines and incurs fixed cost as follows in a month $200 for building rent $300 for administrative expense and $100 for utilities. On the hand, it incurs the following variable cost per unit $10 pass material and $15 direct labor. The companys production capacity is 300 units per month. Table 1 shows the companys variable cost and fixed cost at each level of quantity produced. On the other hand, Figure 1 shows the short run average total cost curve. It should be noted that as the quantity produced is increased, ATC declines because of economies of scale, managerial specialization, and use of more efficient labor. Figure 1. ATC Curve in the Short-runHowever, in the long run, ATC curve will begin to inflect because of the diseconomies of scale as production expands further (Pindyck and Rubinfeld 2005). Thus, the long run ATC curve will tend to slope downward at first an d begin to