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Eco 204 s ajaz hussain do not distribute from the case

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Unformatted text preview: rcial prices are constant at $800/hour so that: ( ( ( { { ( To compute the breakeven commercial hours, we need the problem: ) ) and } ) } ) . At first, this looks like an easy Go through each cost item in Exhibit 2 and identify fixed from variable costs. Add up all the fixed costs in any month (why?) to get In each month, add up the variable costs to get for each month, create a scatter plot of hours, estimate the best fitting line, and compute from the equation. against The problem with this process is that most analysts identify fixed cost vs. variable cost on the basis of whether the cost is constant or variable over time. According to this incorrect view, PDS’s costs would be categorized as follows: January February March Space costs: Rent Custodial services Type of Cost $8,000 1,240 $8,000 $8,000 1,240 1,240 Fixed Fixed 95,000 5,400 95,000 95,000 5,400 5,400 Fixed Fixed 25,500 680 1,633 25,500 25,500 680 680 1,592 1,803 Fixed Fixed Variable Wages and salaries Operations Systems development and maintenance Administration Sales 29,496 12,000 9,000 11,200 29,184 30,264 12,000 12,000 9,000 9,000 11,200 11,200 Variable Fixed Fixed Fixed Materials Sales promotions Corporate services 9,031 7,909 15,424 8,731 10,317 7,039 8,083 15,359 15,236 Variable Variable Variable Equipment costs Computer leases Maintenance Depreciation: Computer equipment Office equipment and fixtures Power 36 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 problem with this approach is that some cost figures consist of fixed and variable cost. We appeal to PDSs business models to identify such “quasi-fixed-variable” costs. Based on PDS’s business model (not from the expense report) – we know that customers log onto PDS’s computers to perform data analysis and discuss the results with someone. The computers will always consume some base amount of power (just as human have a metabolic base rate) which gives rise to the fixed cost of power. And whenever someone logs on to perform data analysis, CPU usage spikes up, requiring greater power which gives rise to the variable cost of power. Thus, the power cost consists of the fixed cost of power as well as a variable cost of power. The case tells us that there are 6 salaried staff and part time, hourly waged, workers. As such, the operations costs consists of the fixed cost of operations as well as a variable cost of operations. What about materials, sales promotion and corporate services? For these, a variety of treatments are possible (a rigorous analysis would incorporate these scenarios). For example, one could treat materials as a quasi-variable input and separate the cost into fixed and variable cost components. Being constrained for time, ignore material costs by arguing that the case doesn’t tell us what materials are, most likely related to the “other services”, and treated as fixed expense, equal to the March 2003 materials expenses (one can also drop this cost f...
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