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Homework answers / question archive / The following terms are used to describe various economic characteristics of costs
The following terms are used to describe various economic characteristics of costs. a. Opportunity cost - an opportunity cost is defined as the benefit that is sacrificed when the choice of one action precludes taking an alternative course of action. b. Out-of-pocket cost - are those that require the payment of cash or other assets as a result of their incurrence. c. Sunk cost - are costs that have been incurred in the past. Consequently, they do not affect future costs and cannot be changed by any current or future action. d. Differential cost - is the amount by which the cost differs under two alternative actions. e. Marginal cost - is the incremental cost of producing one additional unit f. Average cost - is the total cost, for whatever quantity is manufactured, divided by the number of units manufactured. Required: Choose one of the terms listed above to characterized each of the amounts described below: 1. The cost of feeding 500 children in a public school cafeteria is $800 per day, or $1.60 per child per day. What economie term describes this $1.60 cost? (average cost) 2. The cost of including one extra child in a day-care center. (marginal cost) 3. The cost of merchandise inventory purchased two years ago, which is obsolete. (sunk cost) 4. The management of a high-rise office building uses 2,500 square feet of space in the building for its own management functions. This space could be rented for $250,000. What economic term describes this $250.000 in lost rental revenue? (opportunity cost) 5. The cost of building an automated assembly line in a factory is $800,000. The cost of building a manually operated assembly line is $375,000. What economic term is used to describe the difference between these two amounts? (differential cost) 6. Referring to the preceding question, what economic term is used to describe the $800,000 cost of building the automated assembly line? (out-of-pocket cost) 7. The cost incurred by a computer manufacturer to produce one more unit in its most popular line of laptop computers, (marginal cost)
1.The cost of 1.6 is average cost as it represents cost of feeding a child and is obtained by dividing total cost of feeding children by total number of children which means average cost per child
2.The cost to incur one additional unit is known as marginal cost.therefore cost of including one extra child in the day center is known as marginal cost
3.The cost of inventory purchased 2 years ago is cost incurred in past which represents sunk cost and this cost is not relevant in any decision making as it is already incurred and it does not contain any impact on decision
4.As the management is using the space for its own functions which can be given on rent for 250000,the management is not receiving that 250000 which represents opportunity cost for management
5.Here the cost of two options are given i.e cost of building an automated aasembly line and cost of building an manually operated assembly line that means comparing two options which is known as differential cost i.e difference in two options
6.Cost of building an automated assembly line i.e 800000 is termed as out of pocket cost means we have to pay the cash for that
7.As the cost of one additional unit is called as marginal cost,cost incurred by computer manufacturer to produce one more unit in its most popular line of laptop computers is known as marginal cost
