What Is Production Cost Analysis And Estimation Applied Problems
Production Cost Analysis and Estimation Applied Problems
It is important to understand the economics involved in production costs. This includes understanding marginal product and marginal costs. The following problems analyze these factors for a pizza shop and a shoe company. A table and calculations are provided for better visual understanding.
Problem 1: William’s Pizza Shop
William owns a small pizza shop. He is attempting to lower production cost by increasing the number of pizzas produced by hiring more employees. However, he only has four ovens, which cost him a total of $1000. Hourly wages for each employee cost $500 per week. The following are the calculations and analysis for problems 1a, 1b, 1c, 1d, and 1e. All calculations …show more content…
This would create constant returns to scale. However, if he opened another restaurant in a neighborhood where real estate was more expensive, but he kept his prices and production levels the same, this would create diseconomies to scale (Douglas, 2012). This is because even though he has expanded and created a higher output, his inputs are higher in proportion.
Problem 2: Paradise Shoes Company
The Paradise Shoes Company currently produces 1000 pairs of shoes per week. They are considering leasing an additional shoe making machine in order to raise production to 1200 shoes per week. The following is the calculations and analysis for problems 2a, 2b, 2c, and 2d. All calculations have been rounded to two decimal points for simplification. Additional information is listed in sentence or paragraph form.
TVC = Total Variable Cost
Q = pairs of shoes produced …show more content…
One machine can make 200 pairs of shoes, according to the information presented. Adding an additional machine will bring their production up to 1200 pairs as they had considered. However, adding two machines would bring production levels up to 1400 pairs. This is not the maximized output of 1500, but it is close. Adding three machines would go 100 pairs beyond maximization and would cause the production margin to decline. I would recommend adding two machines, which would bring them up to 93.33% of their
It is important to understand the economics involved in production costs. This includes understanding marginal product and marginal costs. The following problems analyze these factors for a pizza shop and a shoe company. A table and calculations are provided for better visual understanding.
Problem 1: William’s Pizza Shop
William owns a small pizza shop. He is attempting to lower production cost by increasing the number of pizzas produced by hiring more employees. However, he only has four ovens, which cost him a total of $1000. Hourly wages for each employee cost $500 per week. The following are the calculations and analysis for problems 1a, 1b, 1c, 1d, and 1e. All calculations …show more content…
This would create constant returns to scale. However, if he opened another restaurant in a neighborhood where real estate was more expensive, but he kept his prices and production levels the same, this would create diseconomies to scale (Douglas, 2012). This is because even though he has expanded and created a higher output, his inputs are higher in proportion.
Problem 2: Paradise Shoes Company
The Paradise Shoes Company currently produces 1000 pairs of shoes per week. They are considering leasing an additional shoe making machine in order to raise production to 1200 shoes per week. The following is the calculations and analysis for problems 2a, 2b, 2c, and 2d. All calculations have been rounded to two decimal points for simplification. Additional information is listed in sentence or paragraph form.
TVC = Total Variable Cost
Q = pairs of shoes produced …show more content…
One machine can make 200 pairs of shoes, according to the information presented. Adding an additional machine will bring their production up to 1200 pairs as they had considered. However, adding two machines would bring production levels up to 1400 pairs. This is not the maximized output of 1500, but it is close. Adding three machines would go 100 pairs beyond maximization and would cause the production margin to decline. I would recommend adding two machines, which would bring them up to 93.33% of their