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CLA – 1

Name Here

Westcliff University

BUS310 Concepts of Microeconomics

Professor Gautam

May 31, 2021

Calculations for WipeOut Ski Company

In the first part of the question, the fixed costs and variable costs for producing ski by WipeOut

Ski Company has been provided. Based on the given information, it has been asked to calculate

the total cost, average variable cost, average total cost, and marginal cost based on the given

information.

Total Cost

Total cost is the overall cost covered to produce goods and services which includes both the

variable and fixed costs. The sum of variable and fixed costs results in the total cost for the ski

company.

Total Cost (TC) = Fixed Cost (FC) + Variable Cost (VC)

Average Variable Cost

The variable cost incurred to produce a single unit of goods is known as the average variable

cost. When the ski company manufactures ten skis, the variable cost incurred might be different

from the variable cost incurred while producing only two skis. As a result, the average variable

cost provides a detailed measure about the variable cost which fluctuates upon the change in

production quantity[ CITATION Hal861 \l 1033 ]. The average variable cost is derived by

dividing the total variable cost by the number of quantity of skis produced.

Average Variable Cost (AVC) = Variable Cost (VC) / Quantity (Q)

Average Total Cost

The total cost incurred to produce a single unit of goods is known as the average variable cost.

Unlike the average variable cost, it also includes the fixed costs associated with production. The

average total cost helps measure the total cost incurred for producing an unit of goods in a larger
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quantity where the variable costs tend to differ. The average total cost is calculated through the

division of total cost by the number of respective units produced.

Average Total Cost (ATC) = Total Cost (TC) / Quantity (Q)

Marginal Cost

The change in the total cost of production which arise for an organization due to changes in its

production activities is known as the marginal cost[ CITATION Hal88 \l 1033 ]. Marginal cost is

calculated by dividing the change in total cost by the change in quantities produced.

Marginal Cost (MC) = (TC2 – TC1) / (Q2 – Q1)

Calculation

Table 1

Calculation for WipeOut Ski Company.

Quantit Variable Fixed Total Cost Average Variable Average Total Marginal

y (Q) Cost (VC) Cost (FC) (TC) Cost (AVC) Cost (ATC) Cost (MC)

0 $ - $ 30.00 $ 30.00 $ - $ - $ -
1 $ 10.00 $ 30.00 $ 40.00 10 40 $ 10.00
2 $ 25.00 $ 30.00 $ 55.00 12.5 27.5 $ 15.00
3 $ 45.00 $ 30.00 $ 75.00 15 25 $ 20.00
4 $ 70.00 $ 30.00 $ 100.00 17.5 25 $ 25.00
5 $ 100.00 $ 30.00 $ 130.00 20 26 $ 30.00
6 $ 135.00 $ 30.00 $ 165.00 22.5 27.5 $ 35.00

Profit Calculations

Given,

Units = 5
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Selling Price (Unit) = $25

Sales = 5 * $25 = $125

Total Cost (TC)

The decision to sell 5 units of ski at unit price of $25 per ski, WipeOut Ski Company will

generate a total of $125 in sales. However, the total cost incurred to produce 5 skis would be

$130 resulting in a loss of $5 for the company.

Average Total Cost (ATC)

While producing 5 units of skis, the average total cost of producing a ski will be $26.

However, the company is selling an unit of ski for $25. At this rate, the company will be selling

each ski facing a loss of $1 per sale. Since, the average total cost to produce 5 skis is higher than

the revenue generated through the sales of 5 skis, the company will face a loss as well.

Marginal Cost (MC)

Since, the marginal cost of producing 5 units than the reveneu generated by selling ski at

an unit price of $25, the company will still be facing loss from the perspective of the marginal

cost theory as well.

Computer Company

The given information about the computer company provides the fixed costs, and

marginal costs for producing till seven units of computers. For the first unit produced, the

marginal cost equals the variable cost which becomes easier to calculate the total cost, average

variable cost, and average total cost based on the formulas given earlier. By adding the previous

total cost with the respective marginal costs, the total cost for every unit has been calculated.

Once the total cost has been calculated, the variable cost for each unit is calculated by reducing

the fixed cost from the total cost. Once, the variable cost, and total cost are calculated, these
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costs are divided by the quantity of units to calculate the average variable cost, and average total

cost.

Table 2

Calculations for Computer Company.

Quantit Variable Fixed Total Cost Average Average Margina

y (Q) Cost (VC) Cost (TC) Variable Total l Cost

(FC) Cost Cost (MC)

(AVC) (ATC)
1 $ $ $ $ $ $700.00

700.00 250.00 950.00 700.00 950.00

950.00 250.00 1,200.00 475.00 600.00

1,250.00 250.00 1,500.00 416.67 500.00

1,600.00 250.00 1,850.00 400.00 462.50

2,000.00 250.00 2,250.00 400.00 450.00

2,450.00 250.00 2,700.00 408.33 450.00

2,950.00 250.00 3,200.00 421.43 457.14

Zero profit point is the point when the marginal cost equals the average total

cost[ CITATION DeG96 \l 1033 ]. The zero profit point for Computer Company is when six

units of computer is produced. On the other hand, the shut-down point is the point when the
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marginal cost equals the average variable cost [ CITATION Gre201 \l 1033 ].The shut-down

point for Computer Company happens while producing 5 units of computer.

Profit Calculations

Situation 1

Given,

Selling Price = $500

Items Sold = 7

Total Cost = $3200

Revenue = $500 * 7 = $3,500

Profit = $3,500 - $3,200 = $300

Hence, by selling computer at $500 per unit, the company will generate a total profit of $300.

Situation 2

Given,
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Selling Price = $300

Items Sold = 7

Total Cost = $3200

Revenue = $300 * 7 = $2100

Loss = $3200 - $2100 = $1100

Hence, by selling computer at $300 per unit, the company will face a loss of $1,100.
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Conclusions

Hence, the company WipeOut will face a loss no matter what by selling 5 skis at the unit

price of $25 based on the figures obtained by calculating its total cost, average total cost, and

marginal cost. On the other hand, the computer company may benefit by selling its computer at

the price point of $500 rather than $300.

References

DeGraba, P. (1996). Why lever into a Zero‐Profit industry: Tying, foreclosure, and exclusion.

Journal of Economics & Management Strategy,, 5(43), 433-447.

Greenlaw, S. A., & Shapiro, D. (2020). Principles of microeconomics2E. OpexStax.

Hall, R. E. (1988). The relation between price and marginal cost in US industry. Journal of

political Economy, 96(5), 921-947. https://doi.org/10.1086/261570.

Hall, R. E., Blanchard, O. J., & Hubbard, R. (1986). Market structure and macroeconomic

fluctuations. Brookings papers on economic activity, 1986(2), 285-338.

https://doi.org/10.2307/2534476.