Economic Principle Analysis: Maleny Dairies, Week 6 Assignment

This assignment analyzes the economic principles applicable to Maleny Dairies, a dairy farm that recently invested in automation. The analysis begins by defining variable and fixed costs within the dairy farming context. The assignment then examines the impact of the investment in robots on the c...Read More

Running head: ECONOMIC PRINCIPLE
Economic Principle
Name of the Student:
Name of the University:
Author’s Note:

1ECONOMIC PRINCIPLE
Table of Contents
Part a:.........................................................................................................................................2
Part b:.........................................................................................................................................2
Part c:.........................................................................................................................................3
References and bibliography:.....................................................................................................5

2ECONOMIC PRINCIPLE
Part a:
Dairy forms mainly cultivate cattle and other live stocks for milk, and they processes
those milk and sell it to the market. Therefore, the main source of the revenue is the selling of
milk products and the main input costs are related to the cultivation of cattle and processing
of milk. The costs structure of the dairy farm can be well analysed and classified into two
categories, one is the variable costs and the other is the fixed costs (Webster 2014).
Variable costs are those which are required for the production and it directly varies
with the production volume. It implies, if the volume of output increases then the variable
cost also increases and if the volume of output decreases then the variable cost also decreases.
Therefore, variable costs for the Maleny Dairies would be those expenses which directly vary
with the production of milk and milk products. Some examples of such variable costs for the
Maleny Dairies are the cost of seeds, lime, fertilizers, herbicides, diesel fuel and so on.
On the other hand, fixed costs are those expenses which do not vary with respect to
the change in volume of output. In short run it remains constant irrespective of change in
volume of output. It is the long run commitment of a business that the organisation must
recover in long run to make a profit. Some examples of fixed costs for the Maleny Dairies are
Rent, Depreciation of equipments, Insurance and taxes (Webster 2014).
Part b:
Hoppers’ invested $2.5 million in their dairy farm Maleny Dairies recently to upgrade
their processing plant. They have introduced two robots for stacking crates. Investment in
robots and other up gradation of the plant with an objective of automation of their
manufacturing process would result in costs savings mainly in variable costs. It can be
observed from the given case study that, use of such robots for crate stacking would result

3ECONOMIC PRINCIPLE
into a savings of labour costs. Moreover, it would result into a speedy delivery of their
products to the desired locations. Therefore, it would result into a decrease in variable costs,
but it would increase the fixed costs due to maintenance and depreciation of the robots.
Therefore, investment into technologies and up gradation of the processing plant would result
into decrease in marginal costs and average variable costs, but the total fixed costs and
average fixed costs will be increased in the same time (Hirschey and Bentzen 2016).
Part c:
Quantity
Costs
0
Variable costs
Total costs
Quantity
Costs
0
AVC
ATC
MC

4ECONOMIC PRINCIPLE
From the above graphs, it can be observed that, with the investment in the up
gradation of the processing plant, the variable costs of the plant has been decreased and the
fixed costs of the plant have been increased. In the first diagram above the effect of such
changes on the total cost structure has been shown. In the first diagram all the lines with the
black colour was depicting the initial cost structure of the company. All the red colour curves
are representing the cost structure of the company after the investment in robots and up
gradation of the plant. In the second diagram, ATC and AVC in red colour represent the
average cost structure of the company after the investment in the robots and up gradation.
With the decrease in average variable costs, the average total cost curve has been shifted
downward. The gap between the ATC and AVC represents the average fixed costs. As the
average fixed costs have been increased the gap between the ATC and AVC have been
increased. Taking the joint effect from the increase in average fixed costs and a
comparatively higher increase in average variable costs the marginal cost curve also shifted
downward slightly (Brickley Smith and Zimmerman 2015).

5ECONOMIC PRINCIPLE
References and bibliography:
Brickley, J., Smith, C. and Zimmerman, J., 2015. Managerial economics and organizational
architecture. McGraw-Hill Education.
Froeb, L.M., McCann, B.T. and Ward, M.R., 2015. Managerial economics. Cengage
learning.
Hirschey, M. and Bentzen, E., 2016. Managerial economics. Cengage Learning.
Webster, T.J., 2014. Managerial Economics: Tools for Analyzing Business Strategy.
Lexington Books.