Summary of Economics of Strategy Book Essay

The Marginal Cost graph is a function of change in total cost divided by change in quantity produced. Marginal cost is the added cost of producing one additional unit of production, or the savings in not producing one additional unit. The graph decreases until the fourth unit of production, and then increases rapidly, as marginal cost is tied to total cost and is thus subject to the law of diminishing returns.

The total cost of production of Sony’s new product is the addition of both fixed and variable costs. Fixed costs are assets within a business that are not used up or sold during the typical production course e.g. buildings and machinery. Variable costs are costs that fluctuate in time with the production output or sales revenue of a company such as Sony e.g. raw material and labour costs. Figure 1.1 shows how the total cost is composed of both fixed and variable costs.

• This cost method does not provide the best system for JDCW’s cost allocation. By using only three overhead rates the present system grossly undermines the true production costs since other activities of the production process are not acknowledged.

Mass production is inflexible because it is difficult to alter a design or production process after a production line is implemented. Also, all products produced on one production line will be identical or very similar, and introducing variety to satisfy individual tastes is not easy. However, some variety can be achieved by applying different finishes and decorations at the end of the production line if necessary.

CH 3. 2. Appalachian Coal Mining believes that it can increase labor productivity and, therefore, net revenue by reducing air pollution in its mines. It estimates that the marginal cost function for reducing pollution by installing additional capital equipment is MC = 40P where P represents a reduction of one unit of pollution in the mines. It also feels that for every unit of pollution reduction the marginal increase in revenue (MR) is MR = 1,000 - 10P

On the other hand, economies of scale occurs when firms expand their scale of production as they gain benefits in some aspects. Strategically, large firms can afford to advertise or even provide additional services such as free delivery. With a large output, the average cost of advertising and the provision of services per output reduce. Besides, when purchasing raw materials in bulk, large firms are often given discounts. Financially, large firms are well-established and reliable so finance is more accessible and interest rate is also relatively lower.

According to, Skills for Business Decisions, “Cost-volume-profit (CVP) analysis examines changes in profits in response to changes in sales volumes, costs, and prices.” (Kimmel P.D. 2009) A company’s profit is the CVP profit equation of Profit = Revenue – Expenses. A Cost-volume-profit (CVP) analysis consists of five basic components that include:

(Long-Run Costs) Suppose the firm has only three possible scales of production as shown below:

Marginal cost is the change in the total cost that arises when the quantity produced has an increment by unit. That is, it is the cost of producing one more unit of a good. In general terms, marginal cost at each level of production includes any additional costs required to produce the next unit.

-Economies of scale are very important for a low-value product, which is more difficult for new entrants to compete with existing manufacturers

The proportionate saving in costs gained by an increased level of production is with a higher output , it comes with a cheaper overall cost

Increasing returns are the natural outcome of decreasing output costs and have external and internal factors which influence economies of scale (Ossa, n.d.). Economies of scale are influenced externally by industry size, rather than firm size and include

Ans: Marginal cost (MC) is the extra total cost resulting from 1 extra unit of output. Average total cost resultiong is the sum of ever decling average fixed cost (AFC) and average variable cost (AVC). Average total cost stands for (AC). In the short run the costs are generally represented by a U- shaped curve that is always intersected at its minimum point by the rising MC curve.

No economies of scale – With zero economies of scale, firms cannot depend on the fact that higher production will lead to falling average cost. Hence, there is increasing marginal cost with the production of higher output and there is no benefit from increasing sale.

A variable cost is a corporate expense that varies with production output. Variable costs are those costs that vary depending on a company's production volume; they rise as production increases and fall as production decreases (Variable Cost, n.d.); in the case study for all cost per event such