Session _9 Costs

Session _9 Costs - Costs Costs Profit to me is a cost to...

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Unformatted text preview: Costs Costs Profit to me is a cost to you OBJECTIVES You should be able to: You should be able to: 1. EXPLAIN the difference between categories of economic costs. 1. 2. 2. 3. 4. Distinguish between Quasi & Pure Rents. Name factors that determine costs. Plot IM Flash Cost Curves on Excel. Contractual Non­Contractual Economic vs. Financial Economic vs. Financial Forecasting Cost Curves show EXPECTED costs at all Cost possible levels of output Demand Curves show EXPECTED Demand quantity sold at all possible prices quantity Accounting forecasts show EXPECTED Accounting demand given one level of output or one price level price Categories of Economic Costs Categories Contractual Costs Non­contractual Costs Known prior to the activity Unavoidable (fixed) Avoidable (variable) Unknown prior to the activity “Rents” or “Profits” Categories of Economic Costs Categories Revenue ­COGS (Avoidable Contractual Costs) =Gross Profit (Gross Contribution Margin, Quasi Rent) ­SGA (Unavoidable Contractual Costs) ­Depreciation = Operating Income ­Taxes (Unavoidable Contractual Costs, but…) ­Int. Expense =Net Income (Contribution Margin) Dividends Retained Earnings (Quasi Rents/Non­contractual Costs) Total, Marginal, & Average Costs Total, Cost Relationships Cost Relationships Economic Costs (EC) = Accounting Costs (AC) + Expected Rents (ER) = Total Fixed Costs (TFC) + Total Variable Costs (TVC) Accounting Costs (AC) Profit Maximization Profit A firm should increase output as long as marginal revenue exceeds marginal cost A firm should not increase output if marginal cost exceeds marginal revenue At the profit­maximizing level of output, MR=MC Cost Theory: Volume vs. Rate Cost Theory: Volume vs. Rate C/unit cost Volume effect > Rate effect Rate effect > Volume effect Q /unit time q min. Generic vs. Specific Assets C/unit cost AVC (A) specialized equipment Cost Theory: Cost Theory: AVC (B) generic equipment q min A & B. Q /unit time Generic vs. Specific Assets C/unit cost AVC Cost Theory: Cost Theory: AVC actual AVC min. Q /unit time q actual q min. AVC (q) = AVC min +(q ­ q min)2 * 1/scale factor ...
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