Production and Cost Analysis

The Case in this module demonstrates how cost and production analysis aids managers in making decisions that maximize profit. To conduct this analysis, thoroughly review the Background materials, fill in the tables and submit a 4- to 5-page report.

The following table gives the total weekly output of bicycles at Al’s Bicycle Town.

Table 1
Labor	Total Product (TP)	Average Product of Labor (AP)	Marginal Product of Labor (MP)
0	0	n/a	n/a
1	100	100	100
2	300
3	450
4			110
5	630
6		110

· Complete this table.

· Draw the graphs of the marginal product (MP) and the average product (AP).

· To learn how to plot the data in Excel, see https://www.youtube.com/watch?v=B3U9tDcoNeI

· Where do the AP and MP curves cross?

The cost of 1 worker is $2,000 per month. Total fixed cost is $4,000 per month.

· Complete Table 2 using your answers from Table 1 and by computing total variable cost (TVC) and total cost (TC).

Table 2
Labor	Total Product (TP)	Total Variable Cost (TVC)	Total Cost (TC)
0	0	n/a	4,000
1	100	2,000
2	300
3	450
4			12,000
5	630
6		12,000

· Draw the graphs of the TC and TVC curves. What is the relationship between these two curves?

· Complete Table 3 by using your answers from the previous Tables and calculating the AVC, ATC, and MC.

Table 3
Total Product (TP)	Average Variable Cost (AVC)	Average Total Cost (ATC)	Marginal Cost (MC)
0	n/a	n/a	n/a
100	20		20
300
450
		21.43
630
			66.67

· Draw the graphs of the ATC, AVC, and MC curves. What is the relationship between the ATC and AVC curves? Between the MC and AVC curves?

Suppose that Al discovers new technology that boosts the productivity of his workers, so that more bicycles can be produced than before.

· Complete Table 4, which presents production data with the new technology.

Table 4
Labor	Total Product (TP)	Average Product of Labor (AP)	Marginal Product of Labor (MP)
0	0	n/a	n/a
1	120	120	120
2	360
3	540
4	672
5	756
6	792

Al’s fixed cost remains at $4,000, and he can continue to hire workers at the monthly rate of $2,000.

· Use the new technology data to complete Tables 5 and 6.

Table 5
Labor	Total Product (TP)	Total Variable Cost (TVC)	Total Cost (TC)
0	0	n/a
1	120
2	360
3	540
4	672
5	756
6	792

· Draw the ATC and MC curves you just entered in Table 5. How do the old and new ATC curves compare? The old and the new MC curves?

Table 6
Total Product (TP)	Average Variable Cost (AVC)	Average Total Cost (ATC)	Marginal Cost (MC)
0	n/a	n/a	n/a
120
360
540
672
756
792

Return to the old technology data. Suppose that the cost of Al’s fixed inputs remains the same at $4,000, but the cost of labor rises. Specifically, suppose that a worker now receives $3,000 per month.

· Complete Table 7 for the two missing TP. Copy your answers from Table 1.

Table 7
Labor	Total Product (TP)	Total Variable Cost (TVC)	Total Cost (TC)
0	0	n/a	4,000
1	100	3,000
2	300
3	450
4			16,000
5	630
6		18,000

In Table 8 compare the cost before and after the increase.

Table 8
	Before the Increase	After the Increase
TP	ATC	MC	ATC	MC
0
100
300
450
630

· Last question: How did the rise in variable costs affect the average total cost? The marginal cost?