Calculate- total variable cost and average variable cost, Cost Accounting

The firm currently uses 50,000 workers to produce 200,000 units of output per day. The daily wage per worker is $80, and the price of the firm’s output is $25. The cost of other variable inputs is $400,000 per day.
Assume that total fixed cost equals $1,000,000. Calculate the values for the following four formulas:

•    Total Variable Cost = (Number of Workers * Worker’s Daily Wage) + Other Variable Costs
•    Average Variable Cost = Total Variable Cost / Units of Output per Day
•    Average Total Cost = (Total Variable Cost +Total Fixed Cost) / Units of Output per Day
•    Worker Productivity = Units of Output per Day / Number of Workers

Then, assume that total fixed cost equals $3,000,000, and recalculate the values of the four variables listed above.
For both cases, calculate the firm’s profit or loss.
For both sets of calculations, compare the firm’s output price and the calculated average variable cost and average total cost. Should the firm shutdown immediately when the total fixed cost equals $1,000,000? Should the firm shut down immediately when the total fixed cost equals $3,000,000?

For one of the cases, if the firm can operate at a loss in the short-run, how many employees need to be laid off in order for the company to break even? To calculate the number of workers to be laid off, divide the loss for the two situations by the daily wage per worker. Given a lower number of employees now working at the company, what is the change in worker productivity? Is the change in worker too large, and the firm should shut down immediately? Or in your opinion, can the workers increase their productivity, assuming that the units of output per day remain fixed at 200,000 units, so that the firm operates at a breakeven state?
Provide a two to four page report to management of the firm that discusses what should be done.

Be sure to show your work to support the decision you outline in your report.A number of assumptions underlie the logic of pure competition.

1) A large number of firms and household are interacting in each market.

2) Firms in a given market produce undifferentiated, or homogeneous, products.

3) New firms are free to enter industries and to compete for profits. The first two imply that firms have no control over input prices or output prices; the third implies that opportunities for positive profit are eliminated in the long run.

In this unit, we will explore the implications of relaxing these assumptions - focusing on monopolies, oligopolies, and monopolistic competition.

A market in which individual firms have some control over price is imperfectly competitive. Three forms of imperfect competition are monopoly, oligopoly, and monopolistic competition. A pure monopoly is an industry with a single firm that produces a product for which there are no close substitutes and in which there are significant barriers to entry.

For a monopolist, an increase in output involves not just producing more and selling it but also reducing the price of its output to sell it. The marginal revenue is not equal to product price, as it is in competition. Instead, marginal revenue is lower than price because to raise output one unit and to be able to sell that one unit, the firm must lower the price it charges to all buyers.

Compared with a competitively organized industry, a monopolist restricts output, charges higher prices, and earns positive profits. Because marginal revenue always lies below the demand curve for a monopoly, monopolists will always charge a price higher than marginal cost (the price that would be set by perfect competition).

A monopolistically competitive industry has the following structural characteristics :

1) a large number of firms,

2) no barriers to entry, and

3) product differentiation.

Relatively good substitutes for a monopolistic competitor's products are available. Monopolistic competitors try to achieve a degree of market power by differentiating their products.

An oligopoly is an industry dominated by a few firms that, by virtue of their individual sizes, are large enough to influence market price. The behavior of a single oligopolistic firm depends on the reactions it expects of all the other firms in the industry. Industrial strategies usually are very complicated and difficult to generalize.

Several models of oligopoly include:

• The Cournot model, which holds that a series of output-adjustment decisions in a duopoly leads to a final level of output between that which would prevail under perfect competition and that which would be set by a monopoly.

• The Kinked demand curve model which predicts that in oligopolistic industries price is likely to be more stable than costs.

• The Price-leadership model, in which one dominant form sets prices and all the

Posted Date: 2/14/2013 4:12:14 AM | Location : United States

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