A company produces high quality hoodies. The cost per hoodie is:

Material$10

Thread$1

Decorations on the hoodies$5

Shipping and handling$1

Each worker earns $27,000 annually in salary and benefits. The number of workers changes based on the level of production.

The artist who creates the designs on the hoodies is paid $12,000 annually. Senior management are paid a total of $176,000 annually. Other annual costs are:

Taxes and Insurance$14,000

Utilities$40,000

Rent$29,500

Miscellaneous Overhead Expenses$15,500

The following production is possible:

No. Of Workers

0

1

2

3

4

5

6

7

No. Of Hoodies that can be made

0

7,000

16,000

25,000

33,000

40,000

42,000

41,000

1.Using all the costs provided, complete the following table and answer the questions. It would be easier if you set this up in an Excel spreadsheet.

The first step is to identify which are fixed costs and which are variable costs. All costs need to be included. 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.

# of workers Q TVC AVC TC ATC MC

TVC/Q FC+VC TC/Q TC/Q

0 0

1 7000

2 16000

3 25000

4 33000

5 40000

6 42000

7 41000

Explain why does quantity decrease when the 7^th worker is added? and What is the term for this effect?

What is the lowest price you would be willing to start producing this new product?