Firms: Types, Production and Costs: Question 2
Syllabus 3.6
Larkspur Crafts is a small workshop that makes wooden phone stands. Each month, the workshop pays a fixed $450 in rent and machine-leasing costs, whatever the number of phone stands it produces. Making each phone stand also uses $1.50 of wood and varnish.
In one particular month, the workshop makes 300 phone stands.
(a) State the workshop's total fixed cost for the month, and explain why this cost does not change however many phone stands are produced that month. [2]
(b) Calculate the workshop's total variable cost for the month, and hence its total cost of producing 300 phone stands. [2]
(c) Calculate the average cost of producing one phone stand in this month. [2]
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Worked solution
Part (a): Fixed cost
The workshop’s rent and machine-leasing charges add up to $450 every month, and this amount is paid in full whatever the level of output. Even if the workshop made zero phone stands, or 1000, it would still owe $450 for rent and leasing. A cost that does not change as output changes is a fixed cost.
Part (b): Variable cost and total cost
Each phone stand uses $1.50 of wood and varnish, and this cost is only incurred when a phone stand is actually made, so it is a variable cost. It rises in total as output rises. For 300 phone stands:
So the total variable cost is $450.
Total cost is the sum of fixed cost and variable cost:
So the total cost of producing 300 phone stands this month is $900.
Part (c): Average cost
Average cost is total cost divided by the quantity of output produced:
So the average cost of producing one phone stand this month is $3.00.
Final answers
- (a) Total fixed cost $450, unchanged whatever the output because rent and leasing are set monthly charges.
- (b) Total variable cost $450; total cost $900.
- (c) Average cost $3.00 per phone stand.