Accountancy 200 Fundamentals of Accounting

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Accountancy 200Fundamentals of Accounting

• THE NATURE OF COSTSPart II

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Marginal and Average Costs
Marginal cost Average cost
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NP2-8 Marginal and Average Costs

• Allan Brothers Company has designed a machine for
  sorting apples. The machine is able to detect
  bruises on an apple.
• Bruised apples are used for making apple sauce.
• Apples without defects are shipped to grocery
  stores.
• Managers at Allan Brothers are uncertain of the
  demand for these sorting machines but have
  estimated the opportunity costs of making
  different numbers of machines.

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NP2-8 Marginal and Average Costs
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NP2-8 Marginal and Average Costs
Why does the marginal cost increase after six
machines?
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NP2-8 Marginal and Average Costs
If the sales price is 70,000 per machine, how
many machines should be produced?
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Fixed and Variable Costs
Fixed costs
- costs that do not change in total,
within relevant range, as output changes.
Variable costs
- costs that change in
proportion to changes in output.
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Fixed and Variable Costs
We can express total cost as a linear function of
fixed and variable costs TC FC VC x Q
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NP2-10 Fixed, Variable and Average Costs
Midstate University is trying to decide whether
to allow 100 more students into the university.
Tuition is 5,000 per year. The controller has
determined the following schedule of costs to
educate students
The current enrollment is 4,200 students.
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NP2-10 Fixed, Variable and Average Costs
Estimate variable cost/unit using the slope of
the TC equation Slope Change in Total
Costs Change in Number of
Students
Estimate total fixed costs using one of the data
points
Now we can state the total cost equation
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NP2-10 Fixed, Variable and Average Costs
Relevant Range
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NP2-10 Fixed, Variable and Average Costs
Opportunity Cost (MC)
Linear Prediction
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NP2-10 Fixed, Variable and Average Costs
The president of the university has calculated
the cost per student in the following manner
30,600,000 / 4,200 7,286 per student
The president was wondering why the university
should accept more students if the tuition is
only 5,000. What is wrong with the presidents
calculation?