Table 8-9 -Refer to Table 8-9 BFor Each of the Three Output Levels,which Plant Size Will

question 28

Essay

Table 8-9
$$\begin{array} { | l | c | c | } \hline & \text { Fixed Cost } & \begin{array} { c } \text { Average } \\\text { Variable Cost }\end{array} \\\hline \text { Small plant } & \$ 10,000 & \$ 2.00 \\\hline \text { Medium plant } & 15,000 & 1.30 \\\hline \text { Large plant } & 25,000 & 0.50 \\\hline\end{array}$$
-Refer to Table 8-9.Clock It To Me manufactures clock radios.The table above shows estimates of fixed cost per period and average variable cost for three possible plant sizes.
a.You are employed as the company's cost accountant and have been asked to prepare cost estimates for various output levels for each of the three possible plant sizes.Record your calculations in the table below.
Average Cost of Production
$$\begin{array} { | l | c | c | c | } \hline & \begin{array} { c } 5,000 \text { Clock } \\\text { Radios }\end{array} & \begin{array} { c } 8,000 \text { Clock } \\\text { Radios }\end{array} & \begin{array} { c } 20,000 \text { Clock } \\\text { Radios }\end{array} \\\hline \text { Small plant } & & & \\\hline \text { Medium plant } & & & \\\hline \text { Large plant } & & & \\\hline\end{array}$$
b.For each of the three output levels,which plant size will generate the lowest average total cost of production?
c.Suppose the firm currently sells 8,000 clock radios per period (using the optimal plant size for this output level).Now,however,it has just secured a long-term contract to supply 20,000 clock radios per period.In the short run,what is the average total cost of producing 20,000 clock radios? Provide a numerical value based on your answer in part a.
d.What happens to average total cost of production in the long run? Provide a numerical value based on your answer in part a.

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Definitions:

Opportunity Cost

Opportunity cost is the potential benefit that one misses out on when choosing one alternative over another.

Black Markets

Illegal markets that arise when selling, trading, or buying goods or services are prohibited by law or are controlled by restrictive practices.

Price Floors

A legal minimum price below which a good or service cannot be sold, intended to protect producers from market prices that are too low.

Agricultural Products

Items derived from farming or the cultivation of animals, including food, fiber, and other goods.