In chapter 1 in the text, it states that \"One of the most important criteria fo

Question

In chapter 1 in the text, it states that "One of the most important criteria for management decision-making is profit." Do you agree with this statement? What are other potential considerations?

Next, what is the relationship between cost and volume? What is an example of a fixed cost? How about a variable cost?

Suppose that fixed costs are equal to $5,000. Also, suppose that variable costs are equal to $4 per unit. Finally, suppose that price equals $5 (and does not depend on volume). What is the cost function? Profit function? Break even output?

Explanation / Answer

Yes, i agree with the statement. Any organization exists and functions to make profit. Organizations not making profits eventually become sick and have to liquidate. So any management decisions that is taken in a firm is taken keeping an eye on the decision's impact on profitability.

Other potential considerations, apart from profitability, can be growth in terms of volume, impact on employees, impact on society etc.

Usually, costs tend to decline at higher levels of volume. This happens due to economies of scale. The fixed costs are divided on a large base, thus reducing the overall cost.

Fixed costs are those costs which occur irrespective of the level of manufacturing activity. For example rent is a fixed cost as it will have to be paid even when the production is nil.

Wages paid to contract workers is an example of variable cost.

Cost function: C(q) = 5000+4(q), where q is the number of units being made.

profit function: 5(q) - 5000 - 4(q) = 1(q) - 5000

At breakeven, profit is nil. So 1(q) - 5000 = 0

or q = 5,000 units.

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.