Exam 8: Cost Analysis and Estimation

Multiplant Operation. Nature's Green, Inc., a manufacturer of alfalfa tablets sold in health-food stores, currently operates just outside of Meno, California. Nature's Green is considering two alternative proposals for expansion, because it has run out of acreage to grow its organically-farmed alfalfa. It has found the following sites where farmers are willing to supply organic alfalfa: Alternative 1: Construct a single plant in Big Cabin, Oklahoma with a monthly production capacity of 50,000 cases, a monthly fixed cost of $275,000, and a variable cost of $100 per case. Alternative 2: Construct three plants, one each in Eudora, Kansas, Springfield, Missouri, and Tonkawa, Oklahoma, with capacities of 25,000, 20,000 and 15,000, respectively, and monthly fixed costs of $200,000, $175,000, and $160,000 each. Variable costs would be only $95 per case because of lower distribution costs. To achieve these cost savings, sales from each smaller plant would be limited to demand within its home state. The total estimated monthly sales volume of 49,000 cases in these three southeastern states is distributed as follows: 20,000 cases in Kansas, 15,000 cases in Missouri, and 14,000 cases in Oklahoma. A. Assuming a wholesale price of $120 per case, calculate the breakeven output quantities for each alternative. B. Assuming sales at the projected levels, which alternative expansion scheme provides Nature's Green with the highest profit per month? C. If sales increase to production capacities, which alternative would prove to be more profitable?

Cost Analysis. Demand and supply conditions in the market for unskilled labor are an important concern to business and government decision makers. Consider the case of a federally-mandated minimum wage set above the equilibrium or market clearing wage level. Some of the following factors have the potential to influence the demand or quantity demanded of unskilled labor. Influences on the supply or quantity supplied can also result. Holding all else equal, describe these influences as increasing or decreasing, and indicate the direction of the resulting movement along or shift in the relevant labor demand and/or supply curve(s). Will wage rates rise or fall? A. An increase in the popularity of self-service restaurants, gas stations, and so on. B. A rise in welfare benefits. C. A decrease in the quality of secondary education. D. A rise in interest rates. E. An increase in the minimum wage.

The foregone value associated with the current rather than next-best use of a given asset is called:

Each point on a long-run average cost curve is the minimum:

Profit Contribution Analysis. Kathy's Bakery is a local full-service bakery in Omaha, Nebraska. Kathy sells loaves of wheat bread for $3 a loaf. Of this amount, $1.50 is profit contribution. She is considering an attempt to differentiate her shop from several other competitors by only producing a special rice bread for customers allergic to wheat. Doing so would increase her unit cost by 50¢ per rice loaf. Current monthly profits are $400 on 800 unit sales. A. Assuming average variable costs are constant at all output levels, what is Kathy's total cost function before the proposed change? B. What will the total cost function be if rice loafs are produced? C. Assume rice loaf prices remain stable at $3. What percentage increase in sales would be necessary to maintain current profit levels?

If the productivity of variable factors is decreasing in the short-run:

Opportunity cost is not:

Marginal cost equals:

The change in cost caused by a given managerial decision is:

Degree of Operating Leverage. DynaLinear, Ltd., produces digital-to-analog converters for compact disk players used by radio stations and audio enthusiasts. It is contemplating an expansion into the moderately-priced home audio market by producing a CD player that would sell at a price of $300. The production of each CD player would require $100 in materials, and 3.75 hours of labor at the rate of $20 per hour for wages and fringe benefits plus variable overhead tied to labor. Energy, supervisory and other variable overhead costs would amount to $50 per unit. The accounting department has derived an allocated fixed overhead charge of $25 per CD player (at a projected volume of 14,000 units) to account for the expected increase in fixed costs. A. What is DynaLinear's breakeven sales volume (in units) for home audio CD players? B. Calculate the degree of operating leverage at a projected volume of 14,000 units and explain what the DOL means.

Opportunity Costs. Three graduate business students are considering operating a tofu burger stand in the Dalles, Oregon, windsurfing resort area during their summer break. This is an alternative to summer employment with a local fruit cannery where they would earn $7,500 each over the three-month summer period. A fully equipped facility can be leased at a cost of $8,000 for the summer. Additional projected costs are $2,000 for insurance, and 25¢ per unit for materials and supplies. Their tofu burgers would be priced at $1.50 per unit. A. What is the accounting cost function for this business? B. What is the economic cost function for this business? C. What is the economic breakeven number of units for this operation? (Assume a $1.50 price and ignore interest costs associated with the timing of the lease payments.)

Learning Curve. Teddy Bear, Inc., a rapidly growing manufacturer of high fashion children's shoes, plans to open a new production facility in Bethesda, Maryland. Based on information provided by the accounting department, the company estimates fixed costs of $500,000 per year and average variable costs at: where AVC is average variable cost (in dollars) and Q is output measured in cases of output per year. A. Calculate total cost and average total cost for the coming year at a projected volume of 50,000 pairs of shoes. B. An increase in worker productivity due to greater experience or learning during the course of the year resulted in a substantial cost saving for the company. Calculate the effect of learning on average total cost if actual total cost was $1,080,000 at an actual volume of 60,000 pairs of shoes.

Multiplant Operation. Tasty Snacks, Inc., a regional snack foods company (corn chips, potato chips, etc.) in the northeast, is considering two alternative proposals for expansion into southeastern states. Alternative 1: Construct a single plant in Chattanooga, Tennessee with a monthly production capacity of 250,000 cases, a monthly fixed cost of $265,000, and a variable cost of $45 per case. Alternative 2: Construct three plants, one each in Birmingham, Alabama, Tallahassee, Florida, and Charlotte, North Carolina, with capacities of 100,000, 80,000 and 70,000, respectively, and monthly fixed costs of $180,000, $150,000, and $135,000 each. Variable costs would be only $44 per case because of lower distribution costs. To achieve these cost savings, sales from each smaller plant would be limited to demand within its home state. The total estimated monthly sales volume of 175,000 cases in these three southeastern states is distributed as follows: 70,000 cases in Florida, 60,000 cases in North Carolina, and 45,000 cases in Alabama. A. Assuming a wholesale price of $50 per case, calculate the breakeven output quantities for each alternative. B. At a wholesale price of $50 per case in all states, and assuming sales at the projected levels, which alternative expansion scheme provides Tasty Snacks with the highest profit per month? C. If sales increase to production capacities, which alternative would prove to be more profitable?

Incremental Costs. Fluff Rite, Inc., manufactures stove top popcorn poppers that it sells to distributors, who then customize and distribute the products to retailers as house-brand poppers. The yearly volume of output is 100,000 units. The selling price and cost per unit are shown below: Management is evaluating the alternative of performing the necessary customizing to allow Fluff Rite to sell its output directly to retailers for $26 per unit. Although no added investment is required in productive facilities, additional processing costs are estimated as:

In the long run, the:

Breakeven Analysis. The Truck Stop is a repair facility specializing in the maintenance and repair of diesel engines just outside of Carlisle, Pennsylvania--one of the largest trucking hubs in the U.S. The business manager of the Truck Stop has been asked by the owners to prepare a financial analysis of the potential of a 24-hour repair operation. Opening such a center would require remodeling the facility and the hiring of some additional staff. Estimated first year expenses for the Truck Stop's diesel service center are: Mechanic and staff salary expenses are estimated on an hourly basis, reflecting additional salary and overtime costs. Supplies and remodeling expenses are above and beyond those required for normal facility operations. Equipment costs represent a prorated share of the centers fixed equipment-leasing costs. Electricity costs of $2,000 reflect additional anticipated usage, whereas heat and taxes of $6,000 reflect an allocated share of fixed expenses.

Fixed costs include:

Average cost declines as output expands in a production process with:

Noncash expenses are:

Profit Contribution Analysis. San Francisco's Pier 9, Inc., sells souvenir T-shirts at a price of $25. Of this amount, $15 is profit contribution. Pier 9 is considering differentiating its product from several other competitors by using higher quality T-shirts. Doing so would increase unit cost by $2.50 per shirt. Current monthly profits are $10,000 on 2,500 unit sales. A. Assuming average variable costs are constant at all output levels, what is FWC's total cost function before the proposed change? B. What will the total cost function be if higher quality t-shirts are used? C. Assume shirt prices remain stable at $25. What percentage increase in sales would be necessary to maintain current profit levels?