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ECO 550 : Managerial Economics

   

Added on  2020-04-29

6 Pages928 Words59 Views
Running head: PRODUCTION ECONOMICS AND DECISIONProduction Economics and DecisionName of the StudentName of the UniversityAuthor note

1PRODUCTION ECONOMICS AND DECISIONTable of ContentsRelevant costs for expansion decision.............................................................................................2Short run and long run cost..............................................................................................................2Decision making criterion for Katrina’s Candies expansion...........................................................3Conditions for company’s expansion..............................................................................................4References........................................................................................................................................5

2PRODUCTION ECONOMICS AND DECISIONRelevant costs for expansion decisionIn reference to business expansion, relevant cost implies avoidable cost. These costscanbe avoided by the choice of one cost over other. These are also known as incremental ordifferential cost. Fixed costs are costs that are fixedthroughout all levels of production. These arenot dependent on the production level. Variable costs on the other hand are cost that varies withlevel of production. Therefore, fixed are generally not considered as relevant costs as they do notchange when production change. Variable costs on the other hand are relevant to businessexpansion. Costs in business are divided in two broad categories – explicit cost and implicit cost.Explicit costs are accounting cost that firms incur on raw materials and describes historicalexpenses. For Katrina’s Candies cost of purchasing bubble tissue paper comes under explicitcost. Another relevant cost for business expansion can be the differences in cost in times ofdeciding over alternative location. In the short run, expansion in the international market can beseen as costly and it would be more expensive to expand to the international market. However,in the long runestablishing business to another country is beneficial in terms of cost and otherbusiness opportunities.Short run and long run costIn the production process, short run refers to the period within which at least one of thefactor of production remain fixed (Nicholson & Snyder, 2014).For example, for a specificcompany the short run might implies the period that the company takes to reach its full capacity.In the short run, business has to incur both fixed and variable costs. Fixed costs are paid at timesof starting of the business. Total fixed costs include cost of monthly lease, machinery cost,security system cost and salary of the CEO and others. Long run on the other hand is defined asthe period when the firm has already reached to its capacity and considers a change of all factors

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