1. A shoe manufacturer is currently producing 100,000 pairs of shoes per year. T

Question

1. A shoe manufacturer is currently producing 100,000 pairs of shoes per year. The firm estimates overhead cost as $6.50 per unit of output and total variable cost as $1,700,000. Assuming a linear function, derive the total cost equation for the firm. Derive average cost.

2. The annual expenditures of a small tax accounting firm are: Rent ($13,000), Secretary’s Salary ($33,000), and Other Expenses ($7,000). The estimated number of tax returns per year is 850. Average processing cost per return is $140, and the average price charged per return is $300. The head of the firm has launched his solo practice after resigning from his $75,000-a-year job. Estimate the economic and accounting profit of the new enterprise and comment on the decision.

Explanation / Answer

First question is answered below

1.

Total Cost (TC) = Overhead cost + Variable cost

TC = 6.5(100,000) + 1700,000

TC = 650,000 + 1,700,000

TC = 2,350,000

AC = TC/Q = 2,350,000 / 100,000 = $23.5

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