PerfectCustomPapers | The owner of a small bread factory and are thinking of lowering costs and expanding.

The owner of a small bread factory and are thinking of lowering costs and expanding.

You are the owner of a small bread factory and are thinking of lowering costs and expanding. Your small-business advisors suggested that you first review your operations and make some technological changes. Complete the following

Explain what a technological change is and how you can use it to lower your costs.

Assume that you thought of something innovative to change your process. Would it help you in the short run? How? The next thing that your small business advisors asked you to do was to break down your costs and see what you can reduce.

Develop a table that you believe shows the explicit fixed costs of the bread factory and the total amount of the costs

Describe your variable costs.

Because you are not an expert yet on analyzing costs and optimal production levels, you decide to do a very simple analysis of your short-run fixed and variable costs if you expand. You decide that your only fixed cost will be the ovens and the variable costs will be the workers. Quantity of Workers Quantity of Ovens Quantity of Loaves of Bread Produced Cost of Ovens Cost of Workers Per Instructions

1.Graph the total cost and the average total cost.

2.Calculate the marginal product of labor, and add it to the table.

3.Calculate the average product of labor, and add it to the table.

4.What is the significance if one is greater than the other?

5.Although there seems to be a great demand for your bread, why would productivity decline when you hire more labor in the short run? How would that reflect on your production graph?

What are your marginal costs?

7.At what point do your marginal costs and your total costs intersect?

8.What happens to the total costs after this point?

9.Calculate your average total costs, your average fixed costs, and your average variable costs.

10.Is your marginal cost greater than or less than your average variable cost or your average total cost? What does that mean? Where do you want your marginal costs to be?

What happens to your average variable costs as your output goes up? Why is that?

12.Explain why in the bread-making business that, in the long run, all costs are variable and the average total costs equals the average variable costs. How would expanding the business affect the economies of scale? When would you have constant return to scale and diseconomies of scale? Provide examples.

13.Where is the optimal level of production and the optimal level of prices in the short run? Is there enough information to make a decision for the long run? What information do you need?

Sample Answer

Technological Change:

A technological change is the introduction of new equipment, processes, or methods of production to improve efficiency and potentially lower costs. Here are some examples for your bread factory:

Automated dough handling systems: These can replace manual labor for tasks like mixing, kneading, and shaping dough, reducing labor costs and increasing consistency.
Programmable ovens: These allow for precise temperature and time control, leading to less wasted product due to burning or underbaking.

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Inventory management software: This can help track ingredients and finished goods, reducing waste and optimizing ordering.

Short-Term Innovation Example:

Let’s say you devise a new, faster-rising dough recipe. This could help you increase production in the short run by allowing more bakes per oven per day. However, you might need to invest in additional proofing cabinets to accommodate the faster-rising dough.

Cost Breakdown Table:

Cost Category	Description	Total Cost
Fixed Costs
Rent	Building lease payment	$5,000/month
Loan Payment	Payment for oven equipment	$2,000/month
Insurance	Factory and equipment insurance	$1,000/month
Variable Costs
Ingredients	Flour, yeast, water, etc.	Varies based on production
Labor	Wages paid to workers	Varies based on production
Utilities	Electricity, gas, water	Varies based on production
Packaging	Bags, boxes, etc.	Varies based on production

Short-Run Cost Analysis:

Table:

Quantity of Workers	Quantity of Ovens (Fixed)	Quantity of Loaves Produced	Cost of Ovens	Cost of Workers
1	1	100	$2,000/month	$X
2	1	180	$2,000/month	$Y
3	1	220	$2,000/month	$Z
4	1		$2,000/month	$W

Graphs:

Plot the total cost (fixed cost + variable cost) and the average total cost (total cost / loaves produced) on separate axes.
Calculate the marginal product of labor (change in loaves produced / change in workers) for each row and add it to the table.
Calculate the average product of labor (total loaves produced / number of workers) for each row and add it to the table.

Analysis:

If the marginal product of labor is greater than the average product of labor, it means production is increasing at an increasing rate. This is the ideal scenario for short-term expansion.
In the short run, adding more workers to a single oven can lead to inefficiencies. There’s only so much space for workers to move around, and tasks might become repetitive or require waiting. This can lead to diminishing marginal returns, where the additional output per worker starts to decrease. This would be reflected by a flattening or even downward slope in the production graph. 6. Marginal cost is the additional cost incurred to produce one more unit of output. It’s calculated by dividing the change in total cost by the change in output.
The intersection point of the marginal cost curve and the total cost curve represents the point where the cost of producing one more unit is equal to the total cost of production so far.
Beyond this point, the total cost curve will typically start to rise more steeply as diminishing returns set in, and the cost of adding each additional unit becomes greater.
Average total cost (ATC) = Total Cost / Quantity Produced Average fixed cost (AFC) = Fixed Cost / Quantity Produced Average variable cost (AVC) = Variable Cost / Quantity Produced
Ideally, you want your marginal cost (MC) to be less than both your average variable cost (AVC) and your average total cost (ATC). This indicates that the cost per unit of production is decreasing as you produce more.
Average variable cost (AVC) often decreases as output goes up because the fixed costs are spread out over a larger number of units. However, as diminishing returns set in and inefficiencies increase, the AVC can start to rise again.

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