# Production Cost Analysis and Estimation Applied Problems

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Production Cost Analysis and Estimation Applied Problems
Production Cost Analysis and Estimation Applied Problems
BUS 640: Managerial Economics
Instructor: Isabel Wan
Date August 10, 2015

Production Cost Analysis and Estimation Applied Problems
Problem 1:
William is the owner of a small pizza shop and is thinking of increasing products and lowering costs. William’s pizza shop owns four ovens and the cost of the four ovens is \$1,000. Each worker is paid \$500 per week. Workers Employed | Quality of pizzas produced per week 0 0 1 75 2 180 3 360 4 600 5 900 6 1140 7 1260 8 1360
Show all of your calculations and processes. Describe your answer for each question in complete sentences, whenever it is necessary.

Workers
Oven Cost Fixed
Labor Cost-Variable
Total Cost
# of Pizza 's-variable
Average Cost
Pizza 's per Worker
INP
0
\$1,000.00
\$
\$1,000.00
0
\$0.00
0
0
1
\$1,000.00
\$500
1,500
75
20
75
75
2
\$1,000.00
1000
2000
180
11.11
90
105
3
\$1,000.00
1500
2500
360
6.94
120
180
4
\$1,000.00
2000
3000
600
5
150
240
5
\$1,000.00
2500
3500
900
3.89
180
300
6
\$1,000.00
3000
4000
1140
3.51
190
240
7
\$1,000.00
3500
4500
1260
3.57
180
120
8
\$1,000.00
4000
5000
1360
3.68
170
100

a. Which inputs are fixed and which are variable in the production function of William’s pizza shop? Over what ranges do there appear to be increasing, constant, and/or diminishing returns to the number of workers employed?
Fixed inputs include only the oven cost of \$1,000 per week. Variable costs include both the labor cost of \$500 per employee and quantity of pizzas produced. Cost diminishes as the number of workers increase until the number of workers reaches 6, and then costs once again begin to increase. b. What number of workers appears to be most efficient in terms of pizza product per worker?
The most efficient number of workers in terms of pizza product per worker is 6 workers at 1,140 pizzas. At this level, the cost per pizza is \$3.51 – the lowest of all cost

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