Chapter 10 ECON

Company Z produces 10,000 units in a year. It has fixed costs of $50,000, direct labor costs of $50,000, and direct material costs of $100,000. What is the unit cost for Company Z's product?

$20/unit

Alpha Company Ltd is looking to lease a photocopier. The monthly lease for the photocopier is $65 and an additional charge of $0.05 per copy. Calculate the lease cost of the photocopier during the month of July if the expected number of copies is 50,000.

$2565

What is a cost pool?

a grouping of individual costs associated with the manufacture of goods

Radio Shack is an example of a company doing which of the following?

focusing exclusively on current business contracts, or short-run production

Caribbean Constructions is planning to expand a complex of resort condos in the Bahama Islands. Which of these is a fixed cost for their project?

land for the the new buildings

Mixed cost is a combination of _____.

variable and fixed costs

If the cost-pool for labor has a total of $125,000 and the driver for that pool is 45,000 labor-hours, what is the activity-based costing rate for labor?

2.78

What is a short-run cost?

A cost incurred while satisfying current contracts.

Sarah owns a factory that produces tin cans. A company puts in an order for twice as many cans as usual, but only for one month. Why might Sarah turn down this order?

Accommodating this order might raise her marginal costs beyond the point where the deal is profitable.

Which of the following are economies of scale most dependent on?

At their core, economies of scale are dependent on the marginal cost of the next good produced.

If a company is trying to determine a fair price for its goods, which of the following matters the most?

Average cost

What is average cost?

Average cost is the total cost divided by the number of products that were made.

Why is knowing the average cost beneficial to the manager?

Because it will assist them in pricing the product.

Which of these does the cost curve demonstrate?

Cost curves, which appear like a right-side up bowl with very steep sides, demonstrate the relationship between the cost of each extra input and its impact on production.

What rule says that too much of a good thing is bad when it comes to increasing outputs?

Diminishing returns

What type of cost is the unchanging base cost that is paid every month when renting a machine?

Fixed

Which of these statements is NOT correct?

Fixed costs change depending on how many items are produced.

Which company attempted to reduce their fixed costs at the Rouge River plant and ended up with massive marginal costs?

Ford

When would a price go below 0?

If the price is below 0, then it means the customer is paying the producer.

If you were going to sum up the main lesson of product curves, how would you best explain it?

If you put too many inputs into a business, it has the potential to hinder production

Transitioning from baking to catering is considered which of the following?

Long-run.

If a company is trying to expand operations, which of the following matters most?

Marginal cost

How does marginal cost differ from total cost?

Marginal cost is the cost of producing just one more unit of a good, while total cost is the sum of all costs of production.

_____ is the amount of resources needed to make just one more of a given product.

Marginal product

What is an example of a direct materials cost?

Paint ingredients

A contract to be completed in the next six months would be considered which of the following?

Part of short-run production.

How do process costing systems allocate expenses to products?

Process costing calculates how much it costs to make a product at each stage by dividing the cost at each stage by the number of products made.

A decrease in average cost by 50% will result in an increase in profits of 50%, assuming that the decreased cost also increases efficiency. Why is this statement FALSE?

Profits will increase by more than 50 percent.

Why would a company choose a process costing system over a job costing system?

The company produces products that are identical.

What is total cost?

The total cost of resources for a given good's production.

_____ is the total amount produced per a set of resources.

Total Product

What is the shape of a cost curve?

A cost curve looks like a right side-up bowl with very steep sides. It shows the relationship between the cost of each extra input and its impact on production.

What is a long-run cost?

A cost pertaining to production following the fulfillment of current contracts.

What types of manufacturing companies would typically use a process costing system?

All of these answers are correct.

What is the shape of a product curve?

Upside down bowl

PEN Company Ltd is a company that produces pens. The unit cost of a pen in January was $1 if 50,000 units are produced, with direct labor and direct material costs are $15,000 and $16,000 respectively. Calculate the unit cost of a pen in February with an order totaling 4000 units if direct labor costs and direct material costs are $6,000 and $4,000 respectively.

$7.25

What is the unit cost?

A unit cost is the amount of money it takes to produce one unit of an item. Mathematically, it is the total cost to produce a product divided by the number of units produced.

What is a util?

A util is a made-up unit to measure utility.

How is variable cost linked to the number of products a company produces?

As the number of products increases, the variable costs increase.

What is the formula to calculate per unit cost in a process costing system?

At each stage, the costs for that stage are added up and then divided by the number of products made.

When foreign automakers achieve economies of scale by positioning plants in the United States to avoid tariffs, which kind of costs are they focused on reducing?

Avoiding tariffs helps to reduce marginal costs.

Identify a fixed cost and a variable cost that are involved in the operation of an automobile.

Fixed cost: insurance; variable cost: gas

A state government offers tax breaks to companies to build factories in their state. If a company takes up this offer and builds a new factory in this state, what will they be reducing?

Fixed costs

Which of these is a straight horizontal line on a total cost curve?

Fixed costs, which are costs that do not change with the quantity produced, are represented as a straight horizontal line on a total cost curve.

What is manufacturing overhead?

Manufacturing overhead includes all expenses incurred during the manufacture of a product that cannot be directly allocated to that product. This differs from direct costs, which are costs that can be directly allocated to a product.

Gary owns a business that manufactures ice cream cones. He uses a machine that produces 24 cones at a time. Paul placed an order of 220 cones, but later asked to add 5 more cones to his order. What expense will be required for Gary to manufacture the additional 5 cones?

No additional cost.

What happens to the short-run production curve when a typical coffee shop has 20 employees on one shift, and why does it happen?

Output is near 0, because there are too many employees working at once, which hinders production.

Describe what happens to the short-run production curve of a coffee shop that hires its second employee.

Output rises dramatically

What is product costing?

Product costing is defined as the process of determining the business expenses associated with the manufacture of a product. Product costing allows a manufacturing company to set a sales price for a product to ensure it makes a profit and allows them to determine if a product is producing a profit.

What does a product curve demonstrate?

Product curves, which are upside-down, bowl-shaped curves, show the relationship between additional inputs, such as labor or capital, and how much of a good is actually produced.

Which of the following is NOT a good definition or example of short-run production?

Production that happens next quarter

Which of the following is a fixed cost?

Rent paid to a landlord.

ABC Electronics has a current contract with XYZ Computers to manufacture 100,000 computer chips for them. Which of the following is the best descriptor for this production that ABC is under obligation to fulfill for XYZ?

Short-run production

According to the law of diminishing marginal returns, at which point is the price for a good the highest?

The law of diminishing marginal returns says that people are most willing to pay the most for the first item.

Accounting software for a bakery is:

The price for the accounting software doesn't change regardless of how much product is sold or made, so it is considered a fixed cost.

Why does the variable cost curve rise quickly at first?

The variable cost curve tends to rise quickly because the production is being tracked from zero. Going from zero to having a factory requires upgrades, and those are represented as variable costs.

How is knowledge of the theory of production useful to a company?

They can determine how much of which resources they need to acquire.

Which factor is most important for expressing total product, but is not needed for working out the average product?

Time

The law of diminishing marginal returns is best summed up by which of the following statements?

Too much of a good thing is bad.

If a company is trying to determine whether or not to enter a new sector, which of the following is most important?

Total cost

Why is knowing total cost helpful to a manager?

Total cost is really important to producers. If you choose to expand operations, it is a useful barometer of how much that expansion could cost.

What is the difference between traditional costing and activity-based costing systems?

Traditional costing uses a single rate to allocate manufacturing overhead to different products, whereas activity-based costing uses cost pools to apply individual rates.

Which of these is the total cost?

Variable cost plus fixed cost

Which of the following is a variable cost?

Variable costs are costs that are directly related to the production of goods.

Which of these is a variable cost?

Variable costs are entirely dependent on the amount of goods produced, while fixed costs are those that do not change with the quantity produced. Fixed costs include things like regulatory fees, accounting overhead, and manager salaries. Raw materials (like ice cream cones) and wages for hourly employees are examples of variable costs.

XYZ Bicycles is trying to make production decisions for the future. Currently, XYZ is able to sell the next bicycle they will produce for more than it costs them to make. Should XYZ increase production, and why?

Yes, they should increase production, because the sales price is greater than the marginal cost of production for the bicycle.

At which point should a producer stop producing goods, according to the law of diminishing marginal returns?

You'd want to stop making the products right before the point where the price a customer is willing to pay is less than the cost to make the product. So this would be the last product unit that is still more than the cost to make the product, the manufacture price.

Which business do you think would have the highest fixed cost?

a major motion picture studio that produces action adventure movies

Long-run production is best defined as which of the following?

a production strategy focusing on business planning beyond current contracts

Sandra is a veterinarian who is planning to start a new practice in Columbus, Ohio. Which of these is a variable cost of starting her business?

medicines and supplies needed to treat patients and perform surgery

The Kikkoman company has been successful in business since the 17th Century due to which of the following?

pursuing long-run goals and expanding production to the types of products that would be profitable in the future

What is the primary focus of innovation?

remaining profitable in the future

All of the following affect marginal cost, EXCEPT _____.

rent on the current factory lease

Variable costs may rise sharply in all of the following situations, EXCEPT:

the renting price of manufacturing facilities increases

Why are all costs associated with long-run production considered to be variable?

when looking to the future there is no way to predict how costs will change