Suppose a Firm Has Two Plants Producing the Same Good

question 82

Multiple Choice

Suppose a firm has two plants producing the same good.Each plant is producing 200 units of the good.In plant A,the short run average cost of production is $20 and in plant B it is $30.If the firm wants to produce a total of 400 units at the lowest cost in the long run,it should:

• A)switch production from plant B to plant A until the average cost of production at each plant is the same.
• B)produce only at plant A and shut down plant B.
• C)switch production from plant B to plant A until the average cost is the same at the two plants.
• D)continue to use the same input ratio.

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Definitions:

Raw Materials

The basic materials from which products are made, usually processed in several stages in the production cycle.

Direct Labor Cost

The total cost of all labor directly involved in the production of goods or services.

Standard Cost System

An accounting framework where standard costs are used for cost control and decision making, typically involving the setting of predetermined costs for products and services.

Labor Efficiency Variance

The difference between the actual labor hours used in production and the standard labor hours expected, multiplied by the labor rate.