Cost Estimation and Analysis - Desklib

ECONOMICS
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Question 4
The general form of total cost equation is shown below.
Total Cost = Fixed Cost + Variable Cost per unit *(Number of Units) ........................... Eq.1
The given total cost equation is shown below.
Total Cost = $100 + $10*(Number of Units) ................................ Eq.2
Comparing equation 1 and equation 2, we ger
a) Fixed Cost = $ 100
b) Variable Cost = $ 10 per unit
c) Incremental cost is the extra cost incurred which would be equal to the variable cost and
hence is $ 10.
Question 5
The sum of all coats during the life-cycle would be referred to as life cycle costs and would
include the various intangible costs besides the tangible costs. The tangible costs would be
often represented in the financial statements of the business but the intangible costs with
regards to social and environmental costs are often unrepresented in traditional financial
statements.
Question 6
The cost of the best rejected opportunity is known as opportunity cost. Typically with regards
to capital, there may be a lot of alternative uses and it is expected that the capital is deployed
in the manner that maximises the returns. In order to pursue this best opportunity, the
business has to forego the returns from the next best opportunity which is known as
opportunity cost.
Question 11
The necessary condition for break-even is that at this activity level, the cost and revenue must
be equal.
Revenue ($) = a0 +a1Dk
Cost ($) = b0

For breakeven, a0 +a1Dk = b0
a1Dk = (b0-a0)
D (million units)=(b0-a0)/a1k
Question 12
The formula for breakeven derived above has been stated below.
D=(b0-a0)/a1k
As per the question, a0=5, a1=8, b0=32 and k =3
Substituting the above, D= (32-5)/(8*3) = 1.125 million units
Question 13
For the given cost function, k is a constant which does not change with activity level x and
hence k indicates the fixed cost. a and b highlight the variable costs considering that they
need to be multiplied/divided by x to reach the underlying cost. The constant a highlights the
variable cost per unit is directly proportional to the underlying output level x and hence
increases linearly with the same. However, the constant b highlights an inversely proportional
relationship with underlying output which may be attributed to economies of scale.
Question 15
The relevant formula to be used is shown below.
Cn=Ck (In/Ik)
where C is the cost , n is the year for which cost has to be estimated and k is the base year and
I is the index for the year.
a) For 2019, Ck = $ 1,000, IK=2, Tn=2.1
C2019 = 1000*(2.1/2) = $1,050