That theme is the cost of doing business”. Firms often have innovate products such as the Washington Redskins, or products that are innovative but used in the wrong way–e.g. the solar-powered trash can indoors. Firms also have issues with the costs of production–e.g. the Chevy volt. Incentives should also be considered when looking at the cost of capital, such as in France and checklists at autoshops.
this is the articles and defend the position of the person making that decision, in whatever way seems satisfactory as it relates to the chapter content and the business world.
Use the concepts found in chapters 3, 4, and 5 to answer your posts.
you need write more than 500 words, and use APA format.
this is key points of chapter 3,4,5.
- Costs are associated with decisions, not activities.
- The opportunity cost of an alternative is the profit you give up to pursue it.
- In computing costs and benefits, consider all costs and benefits that vary with the consequences of a decision and only those costs and benefits that vary with the consequences of the decision. These are the relevant costs and benefits of a decision.
- Fixed costs do not vary with the amount of output. Variable costs change as output changes. Decisions that change output will change only variable costs.
- Accounting profit does not necessarily correspond to real or economic profit.
- The fixed-cost fallacy or sunk-cost fallacy means that you consider irrelevant costs. A common fixed-cost fallacy is to let overhead or depreciation costs influence short-run decisions. The hidden-cost fallacy occurs when you ignore relevant costs. A common hidden-cost fallacy is to ignore the opportunity cost of capital when making investment or shutdown decisions.
- Average cost (AC) is total cost (fixed and variable) divided by total units produced.
- Average cost is irrelevant to an extent decision.
- Marginal cost (MC) is the additional cost incurred by producing and selling one more unit.
- Marginal revenue (MR) is the additional revenue gained from selling one more unit.
- Sell more if MR > MC; sell less if MR < MC. If MR = MC, you are selling the right amount (maximizing profit).
- The relevant costs and benefits of an extent decision are marginal costs and marginal revenue. If the marginal revenue of an activity is larger than the marginal cost, then do more of it.
- An incentive compensation scheme that increases marginal revenue or reduces marginal cost will increase effort. Fixed fees have no effects on effort.
- A good incentive compensation scheme links pay to performance measures that reflect effort.
- Investments imply willingness to trade dollars in the present for dollars in the future. Wealth-creating transactions occur when individuals with low discount rates (rate at which they value future vs current dollars) lend to those with high discount rates.
- Companies, like individuals, have different discount rates, determined by their cost of capital. They invest only in projects that earn a return higher than the cost of capital.
- The NPV rule states that if the present value of the net cash ﬂow of a project is larger than zero, the project earns economic proﬁt (i.e., the investment earns more than the cost of capital).
- Although NPV is the correct way to analyze investments, not all companies use it. Instead, they use break-even analysis because it is easier and more intuitive.
- Break-even quantity is equal to ﬁxed cost divided by the contribution margin. If you expect to sell more than the break-even quantity, then your investment is proﬁtable.
- Avoidable costs can be recovered by shutting down. If the beneﬁts of shutting down (you recover your avoidable costs) are larger than the costs (you forgo revenue), then shut down. The break-even price is average avoidable cost.
- If you incur sunk costs, you are vulnerable to post-investment hold-up. Anticipate hold-up and choose contracts or organizational forms that minimize the costs of hold-up.