Title 3-35 Account Analysis Heavenly Computers is a company started by two engin

Question

Title 3-35 Account Analysis Heavenly Computers is a company started by two engineering students to assemble and market Personal computers to faculty and students. The company operates out of the garage of one of Students' homes. From the following costs of a recent month, compute the total cost function and total Cost for the month: Telephone 60, fi xed Utilities Advertising Insurance Materials 250, fi xed 30% attributable to the garage, 70% to the house 85, fi xed 110, fi xed 5,500, variable, for fi ve computers 2,150: $1,400 fi xed plus $750 for hourly help for assembling five computers

Explanation / Answer

A Cost function is expressed as following -

C(q) = a(q) + b

where a is some numeric value constant to q (that is variable to change in output q) and b is fixed cost that does not change with change in output (q)

q is output/quantity

Lets first calculate fixed costs as follows-

Fixed cost = Telephone + utilties + advertising + insurance + fixed labor cost

Thus fixed cost for this problem is -

Fixed cost = 60 + (30% of 250) + 85 + 110 + 1400 = 1730

Thus we get b = 1730 of the cost equation

Now calculate variable cost (a) as follows -

Variable cost is calcualted as per unit cost and then gets multiplied to q to make total variable cost.

Thus Average VC = (5500/5) + (750/5) = 1100 + 150 = 1250

Hence the cost function is -

C(q) = 1250q + 1730

Now to calculate total cost for the month put q = 5 as here q is 5.As the cost structure is of making 5 computers

Thus total cost = 1250(5) + 1730 = $7980.

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