Being constrained for time ignore material costs by

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Unformatted text preview: rom the calculations). Sales promotion is tricky: sometimes advertising budgets are allocated before sales are realized (ex ante) and are therefore fixed; at other times, there is a fixed advertising budget and a variable promotions expense (say a dinner/drinks to thank a new client) in which case promotion would be quasi-variable. Our approach was to treat sales promotion as fixed and equal to the March 2003 sales promotion budget (an alternative approach would be take the average, or the maximum, sales promotion over Jan-March). Finally, according to the case corporate services refers to payments by PDS to PTC for payroll etc. We’ll treat them as fixed since these expenses are most likely independent of data hours. January February March Type of Cost $8,000 $8,000 $8,000 1,240 1,240 1,240 Fixed Fixed 95,000 95,000 95,000 5,400 5,400 5,400 Fixed Fixed 25,500 25,500 25,500 680 680 680 1,633 1,592 1,803 Fixed Fixed Fixed + Variable Wages and salaries Operations Systems development and maintenance Administration Sales 29,496 29,184 30,264 12,000 12,000 12,000 9,000 9,000 9,000 11,200 11,200 11,200 Fixed + Variable Fixed Fixed Fixed Materials Sales promotions Corporate services 9,031 8,731 10,317 I am ignoring 7,909 7,039 8,083 Assume Fixed $8,000 15,424 15,359 15,236 Assume Fixed $15,000 Space costs: Rent Custodial services Equipment costs Computer leases Maintenance Depreciation: Computer equipment Office equipment and fixtures Power Ideally, expense reports would decompose quasi-fixed-variable cost into the fixed and variable cost components. As such, what do we do? Here’s one strategy. To decompose power expenses we can create a scatterplot of power 37 ECO 204 Chapter 13: The Short Run Cost Minimization Problem (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. expenses against “output”, guesstimate the functional form of the cost function, and use Excel to calculate its parameters. Whatever the functional form of the cost function, its intercept has to the fixed cost of power. Moreover, the functional form of the variable cost function, . The same procedure can be used to decompose the cost of operations. Let’s first do power expenses. Power: Create a scatter plot of power expenses vs. hours. But notice that power is consumed for commercial and intercompany hours as well as when the computers are serviced. That is, the “quantity” on the x-axis will be . Here is the scatter plot – notice that that data points more or less are on a straight line so that the “best fitting” line is linear: The power cost function is: ⏟ ( ⏟ ) We have managed to derive the functional form of the cost function and derive its parameters! Observe that the monthly power fixed cost is about $179 and that each additional hour of commercial, intercompany, or service hours results in $4/hour of variable expenses. In particular, notice that Operations: Create a scatter plot of operations expenses vs. hours. Notice that operation expenses are for commercial and intercompany hours and therefore the “quantity” on the x-axis will be . Here is the scatter plot – notice that that data points more or less are on a straight line so that the “best fitting” line is linear: 38 ECO 204 Chapter 13: The Short Run Cost Minimization Problem (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. The operations cost function is: ⏟( ⏟ ) We have managed to derive the functional form of the cost function and derive its parameters (had to say that one more time). Observe that the monthly operations fixed cost (the salaries) is about $21,600 and that each additional hour of commercial and intercompany costs $24/hour in variable expenses. In particular, notice that Putting all these together, we get: ( ) ( ) Combing all other fixed expenses to power and operations fixed expenses gives. ⏟ ⏟ ⏟ ⏟ ⏟ As such: ( { ( ) } ) 39 ECO 204 Chapter 13: The Short Run Cost Minimization Problem (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not...
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