Chapter: Engineering Economics and Financial Accounting : Production Function and Cost Anaysis

Estimation of Cost

Cost Calculations: Using the above abbreviations and Q for the quantity of output: ATC = TC/Q

ESTIMATION OF COST:

Cost Calculations

Using the above abbreviations and Q for the quantity of output:

ATC = TC/Q

AFC = TFC/Q

AVC = TVC/Q

MC = change in TC/change in Q

Example: Let’s suppose you are making 50 bottles of wine each week. You know that your fixed costs add up to $300, and your variable costs amount to $900. You also know that if you were to make extra 5 bottles, your total cost would rise by $60. What is your total cost; average total cost; average total cost; average variable cost; average fixed cost; and marginal cost?

Answer: Total cost = $300 + $900 = $1200 ATC = $1200/50 = $24

AVC = $900/50 = $18

AFC = $300/50 = $6 MC = $60/5 = $12

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Engineering Economics and Financial Accounting : Production Function and Cost Anaysis : Estimation of Cost |