Week 3
Assignment
Production Cost Analysis and Estimation Applied Problems.
Please, complete the following 3 applied problems in a Word or Excel document.
Show all your calculations and explain your results. Submit your assignment in
the drop box by using the Assignment Submission button.
1. Jennifer Trucking
Company operates a large rig transportation business in Texas that transports
locally grown vegetables to San Diego, California. The company owns 5 large
rigs and hires local drivers paid fixed salaries monthly, regardless of the
number of trips or tons of cargo that each driver transports each month. The
below table presents details about the number of drivers and the total cargo
transported by the company at different staff levels.
a. Which inputs are fixed and which are variable in the
production function of Jennifer Trucking Company? Over what ranges do there
appear to be increasing, constant and/or diminishing returns to the number of
drivers employed?
b. What number of drivers appears to be most efficient in
terms of output per driver?
c. What number of drivers appears to minimize the marginal
cost of transportation assuming that all drivers are paid the same salary?
2. The Palms Dry Cleaning Shop in Fort Lauderdale, Florida,
faces a highly seasonal demand for its services, as the snow-birds retirees
flock to Florida in mid-fall to enjoy the mild winter weather and then return
to their main homes in mid-spring. Given this seasonality, Palms tries to keep
the overhead costs as low as possible and therefore, often uses seasonal
contracted labor to man its operations. The following table shows the labor
costs in each month of operation over the past 12 months as well as the total
number of garments that were dry-cleaned in each month. Palms pays fixed wages
per hour to each employee, and we can assume that the costs of other variable
inputs (such as chemicals, electricity, etc) have remained constant.
a. Derive average variable cost (AVC) data from the data in
this table.
b. Use gradient analysis to provide an estimate of eleven
data points that seem to represent the MC curve over this range of outputs.
Plot these data points and sketch in estimated MC and AVC curves that seem to
best fit these data points.
c. Suppose that demand is estimated to move from its present
(May) level of 3,500 units to 4,000 units next month (June). What is the
incremental cost of meeting this demand?
d. Assuming that Palm’s price to dry clean a garment has
been constant at $15 over the past year, and will remain at that level, what
contribution to overheads and profit can it expect in June?
3. Over the past 12 months the Four Winds Novelty Company
firm has recorded its internet sales (equals monthly output levels) and its
monthly total variable costs (TVC) for a particular novelty item as shown in
the following table. Sales have grown over this period with relatively few
shocks due to uncontrollable weather, political and sporting events. This
online retailer carries no inventories; when it receives a pre-paid on-line
order from a customer, it simply buys the product from a supplier and ships it
out to the customer.
a. Using regression analysis, find an equation that best
fits the data to represent the TVC function.
b. At what sales/output level will marginal costs (MC) reach
a minimum?
c. Estimate the value of TVC for sales/output level 250,000
units, and calculate the 95% confidence interval for your estimate
