Académique Documents
Professionnel Documents
Culture Documents
COST CONCEPTS
DEMAND is the quantity of a certain commodity that is bought at a certain
price at a given place and time.
SUPPLY is the quantity of a certain commodity that is offered for sale at a
certain price at a given place and time.
FIXED COST are costs that do not vary in proportion to the quantity of
output.
VARIABLE COST are costs that vary in proportion to quantity of output.
Elements of Cost:
1) Materials
a) Direct Materials are those which are used in the
finished product itself.
b) Indirect Materials are those materials used in
production but which do not go into the finished
product.
2) Labor
a) Direct Labor is the actual work applied directly to
the manufacture of the product
b) Indirect Labor is the work necessary for the
operation of the factory, but which cannot be
identified with one particular process or product
manufactured.
3) Overhead Expenses
Expenses which cannot be allocated to direct
materials or direct labir.
LAW OF SUPPLY
The supply of the commodity varies directly as the
price of the commodity, though not proportionately
p
r
i
c
e
Supply
LAW OF DEMAND
The demand for a commodity varies inversely as the
price of the commodity, though not proportionately
p
r
i
c
e
Demand
Quantity
p = a - bD
Demand (D)
R
e
v
e
n
u
e
TR pD
TR (a bD) D
or
TR aD bD2
Volume (D)
TC TVC TFC
TC vcD TFC
Variable Cost
Fixed Cost
Volume (D)
or
R
e
v
e
n
u
e
Represents the
Maximum Profit
Total Cost
Volume (D)
a vc
2b
Formulas:
Price:
p a bD
Total Revenue:
TR pD
TR (a bD) D
or
TR aD bD2
Total Cost :
TC TVC TFC
TC vcD TFC
Profit: P TR TC
P pD (vcD TFC)
P (a bD) D vcD TFC
P bD2 (a vc) D TFC
a
D
2b
a vc
2b
(
a
vc
)
(
a
vc
)
4(b)(TFC)
'
D
2(b)
COST CONCEPTS
I.
B:
R
e
or v
e
n
u
e
TFC
D
p vc
'
D'
TFC
p vc
Volume (D)
Examples:
1. A company produces circuit boards to update the
outdated computer equipment. The fixed cost is $42,000
per month and the variable cost is $53 per circuit board.
The selling price per unit is p = $150 0.02D. Maximum
output of the plant is 4000 units per month.
(a) Determine the optimum value for this product.
(b) What is the maximum profit per month?
(c) At what volumes does break-even occur?
(d) What is the companys range of profitable demand?
Examples
2. A large semiconductor plant has approximately 95% of sales
due to a single circuit design. The plant can therefore be
considered to produce 3,000,000 printed circuit boards (PCBs)
per year. Presently, the plant is operating at 60% of capacity.
The selling price of the PCB is p = $19.25 (10- 6 )D, and the
variable cost per PCB is $15.75. At zero output, the plants
annual fixed costs are $1,000,000 and are approximately
constant up to the maximum production quantity per year.
a. What is the present expected annual profit or loss (60%
capacity)?
b. What the percentage of production capacity that will result in
optimal operation? What is the maximum profit or minimum loss
at this optimal volume?
b.Determine at what demand(s) breakeven occurs in the
operation
Examples:
3.A manufacturing company leases for $100,000 per year a
building that houses its manufacturing facilities. In
addition, the machinery in the building is being paid for
installments of $20,000 per year. Each unit of product
produced costs $15 in labor and $10 in materials and can
be sold for $40.
a.How many units per year must be sold for the company
to break even?
b. If 10,000 units per year are sold, what is the annual
profit?
c. If the selling price is lowered to $35 per unit, how many
units must be sold each year for the company to earn a
profit of $60,000 per year?
Examples
6.
A company has established that the relationship
between the sales price for one of its products and
the quantity sold per month is approximately D = 780
10p units. The fixed cost is $800 per month, and
the variable cost is $30 per unit produced. What
number of units should be produced per month and
sold to maximize net profit? What is the maximum
profit per month? Determine the range of profitable
demand.
Examples:
7. The annual fixed costs for a plant are P100,000
and the variable costs are P140,000 at
70%utilization of available capacity with net
sales of P280,000. What is the break even point
in units of production if the selling price per unit
is P40.
Answer:
(a)
p = 1,000 - 0.2D
TC = 1,000 + 2D2
Profit
D*
(b)
D*.
d 2 (Profit)
= - 4.4 < 0
2
dD
Since the second derivative is negative, profit has been maximized at
Answer:
(a) Total Annual Cost (TAC) = Fixed cost + Cost of Heat Loss
= 450X + 50 +
4.80
X1/ 2
d (TAC)
2.40
= 0 = 450 - 3/2
dX
X
X
(b)
3/2
2.40
=
= 0.00533
450
X* = 0.0305 meters
for X > 0.
d 2 (TAC)
3.6
=
> 0
dX2
X5/ 2
(b)
Seatwork:
1. A company has determined that the price and that
monthly demand of one of its products are related by
the equation
D (400 p)
0.08D
d (TR)
= 88.5 0.08(1.75)D0.75
dD
D0.75 =
D=
88.5
(0.08)(1.75)
88.5
(0.08)(1.75)
1/0.75 =
(c)
FC = [$350,000 - 0.1($350,000)](12) =
$3,780,000 per year (10% decrease)
vc = [$0.50 + 0.1 ($0.50)] = $0.55 per unit of
sales (10% increase)
$3,780,000
D =
= $8,400,000 per year
$1 - $0.55
2-20 (a) D =
CF
$2,000,000
=
= 40,000 units per year
p - cv
($90 - $40) / unit
D
TCA = TCB
Volume (D)
Examples
1. Two manufacturing methods are being
considered. Method A has a fixed cost of
P5,000 and a variable cost of P50. Method B
has a fixed cost of P2500 and a variable cost of
150. For what production volume would one
prefer (a) Method A, and (b) Method B?
2.