5.1) why is it important to distinguish between fixed and variable cost?
Fixed cost are the cost who remain the same and don’t change, while the variable cost the cost that varies with the level of activity. It’s very important to distinguish between them because of the decision making as we have to consider only variable cost most of the time.
5.2) Explain how a decrease in input prices or an increase in efficiency would affect costs.
The decrease in input price or an increase in efficiency, would affect the cost because it will lead to decrease the cost in market price. In case of increase the efficiency the same effect will applied because it will also increase the production with same price of input.
5.3) you spent $500,000 on staff training last year. Why should this be treated as a sunk cost? Why should this cost be ignored in making a decision whether to switch coding software?
The sunk cost is a cost that incurred and cannot be retrieved. The sunk cost could be time, money, building, or any other resources that cannot be retrieved. The staff training cost is a sunk cost that any firm or institution have spent to their employee and cannot retrieve it back. For example if the firm has spent cost to develop their employee and the employee has quiet from the firm. The sunk cost be ignored in making decision because it is irrelevant in the decision making. Instead, decision maker should base the strategy on how the company proceed with the business in the future cost.
5.4) Your president bought two acres of land for $200,000 ten years ago. Although it is zoned for commercial use, it currently houses eight small, single – family houses. A property management firm that wants to continue leasing the eight houses has offered you $400,000 for the property. A developer wants to build a 12 – story apartment building on the site and has offered $600,000. What value should you assign to the property?
The value that should be assigned to the property, should be based on the value when that acres land was purchased. If the land was $200,000 ten years ago, the current evaluation should be based on the rate of interest in the market that would swell the merit of $200,000 to its value.
If the market’s value is less than $600,000, the decision should be agreed to sell it to the developer. However, if the market value is more than $600,000, the decision should be revised and sell it within the market’s value.
5.5 A community health center has assembled the following data on cost and volume. Calculate its average and marginal costs for volumes ranging from 25 to 40. What patterns do you see?
Visits Total Costs
20 $2,200
25 $2,250
30 $2,300
35 $2,350
40 $2,400
Average cost = Total cost / number of visits
Marginal cost = difference between successive total cost values
| visits | Total costs | Average Cost ($) | Marginal Cost ($) |
| 20 | $2,200 / 20 | 110 | |
| 25 | $2,250 / 25 | 90 | 50 |
| 30 | $2,300 / 30 | 76.77 | 50 |
| 35 | $2,350 / 35 | 67.14 | 50 |
| 40 | $2,400 / 40 | 60 | 50 |
It is obvious that within specified range, the average cost is decreasing but marginal costs are the same at $50.
