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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 quasivariable. 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 JanMarch). 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 quasifixedvariable 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
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ECO 204 Chapter 13: The Short Run Cost Minimization Problem (this version 20122013) 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 xaxis 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 xaxis 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 20122013) 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 20122013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not...
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 Fall '09
 AJAZHUSSAIN
 Economics, Microeconomics

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