Managerial Economics Study Set 8

Business

Quiz 8 :
Cost Analysis

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Quiz 8 :
Cost Analysis

The firm's total cost comprises of direct labor and material costs, plant overhead cost, and administrative and selling expenses. Of these total cost, direct labor and material costs are variable costs (costs varying with the level of output). On the other hand, plant overhead cost, and administrative and selling expenses are fixed costs (costs that have to be incurred irrespective of the level of output). Incremental or marginal cost img is the addition to the total cost by producing an additional unit of output. Since fixed costs are unchanged, variable costs are used to determine marginal cost. That is, img Thus, the marginal cost to LP of accepting the order from Southeast is img .

The retail price for company A kindle is $199. Each cost is categorized into variable and fixed costs as follows. img img Therefore, the contribution margin amount on a retail price of $199 is img , which is img of retail price.

The cost of next best alternative available to US Airways, that is, selling the land to developer is $2.5 million. Further, the airlines do not meet the acceptance criteria of cost not more than $850,000. The opportunity cost of the foregone alternative is greater than the cost of building the training center at current location. Thus, the optimal decision would be not to build the center at this location and sell the land to the developer. The US Airways, hence, can build the training center at some other location.