a) Distinguish between marginal cost and average cost in production. (2 marks)
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Marginal cost is the change in total cost when another unit is produced. Average cost is the total cost divided by the number of goods produced.
Alternatively:
Marginal cost refers to the additional amount required to produce the x+1th unit. The average cost is the total cost of production of x units of the product divided by x.
The company has set production limit to 10,000 Cans and it sells all the Cans that are produced.
Required:
i) Derive an expression for marginal cost, marginal revenue and marginal profit. (4 marks)
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ii) Determine the cost, revenue and profit when the 2501st Can is produced and sold. (3 marks)
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iii) Determine the cost, revenue and profit when the 7501st Can is produced and sold. (3 marks)
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iv) Advise the company whether to produce the 2501st Can or the 7501st Can. (2 marks)
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Upon producing and selling the 2501st can it will cost the company approximately GH¢25 to produce the can and they will see an added GH¢175 in revenue and GH¢150 in profit. However, when they produce and sell the 7501st can it will cost an additional GH¢325 and they will receive an extra GH¢125 in revenue, but make a loss of GH¢200. The company should produce the 2501st can.
c) If, after expanding its facilities, the company is capable of producing 60,000 Cans in a day and the total daily cost is given by
Required:
How many Cans per day should they produce in order to minimize production costs? (6 marks)
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