A company produces chairs. The cost per chair is:

Materials $20.00

Hardware $0.50

Decorations $6.00

Shipping and handling $10.00

Each worker earns $32,000 annually in salary and benefits. The number of workers changes based on the level of production. This means this is a variable cost.

The artist who creates the designs on the chairs is paid $12,000 annually. Senior management are paid a total of $400,000 annually. Other annual costs are:

Taxes and Insurance $20,000

Utilities $45,000

Rent $126,000

Miscellaneous Overhead Expenses $14,000

The following production is possible:

No. Of Workers	0	1	2	3	4	5	6	7
No. Of Chairs that can be made	0	10,000	22,000	30,000	42,000	75,000	85,000	75,000

1. Using all this information complete the following table and answer the questions. It would be easier if you set this up in an Excel spreadsheet. When you are done, you must submit it as a Word document with your answers.You will use this table to answer questions 2 and 3. (6 marks)

Your first step is to identify which are fixed costs and which are variable costs. If you will have to keep paying the cost whether you produce 0 units of the product or 10,000 units, then it is a fixed cost. In the short run you have to keep paying it. In the long run you may be able to change these fixed costs. A variable cost changes based on how much of the product you produce. But the variable costs may not change all at the same time. Remember there is a sample assignment in Module 9. This would give you some practice before completing this assignment that will be marked.

# of workers	Q	TVC	AVC	AFC	TC	ATC
			TVC / Q	FC / Q	FC + VC	TC/Q
0	0	0			617000
1	10,000	397,000	39.70	61.7	1,014,000	101.40
2	22,000	867,000	39.41	28.04545	1,484,000	67.45
3	30,000	1,191,000	39.70	20.56667	1,808,000	60.27
4	42,000	1,661,000	39.55	14.69048	2,278,000	54.24
5	75,000	2,897,500	38.63	8.226667	3,514,500	46.86
6	85,000	3,294,500	38.76	7.258824	3,911,500	46.02
7	75,000	2,961,500	39.49	8.226667	3,578,500	47.71

MC

TC /Q

39.70

39.17

40.50

39.17

37.47

39.70

33.30

1. What is the lowest price you would be willing to start producing this new product? Be precise. Don't round up to the nearest dollar. (1 mark)

2. If you were already committed to the fixed costs, how low could the price per chair fall before you would consider shutting down production? Remember, in the SHORT RUN, you have to keep paying your fixed costs whether you produce any chairs or not.If you can cover your variable costs, then anything over that will reduce your fixed costs. You may be losing money in the short run but you are losing less money. (1 mark)