Week 4 Discussion Board Response #2

The question I want to ask is how would you know when the average cost will reverse the down trend and start rising again?

Katrinas Candies is attempting to decide whether or not it would beneficial/profitable to the company to expand into international markets. In making this decision, Katrinas Candies management team must analyze the costs associated with the expansion. Explicit costs (both fixed and variable) are those in which the company can account for an outgoing payment (expenditures). A company's explicit costs can include employee wages, payments made to purchase raw materials, business rent/mortgage payments and fees related to purchasing manufacturing equipment, (Lister, 2015). In addition to explicit costs, Katrinas Candies also has to consider implicit costs, or opportunity costs. Opportunity costs are the results of decisions not made, i.e. the amount lost by not expanding. When determining total profit, the company must remember to exclude opportunity costs since those have not actually been incurred. Short run costs can include the variable costs since labor can be manipulated to increase profitability or determine optimal output. Long run costs would be the explicit costs and any unforeseen costs determined by the economy. Using the profit function, Katrinas Candies can determine whether or not expanding is going to be the most profitable decision in the long run. In the short run, using the average total cost function, Katrinas Candies can optimize their current production to save money and use the savings to fund the expansion, invest back into the current operations, or distribute to the shareholders.

The challenge in playing the cost card in any companys operations is to make the determination how to use the economies of scale to the advantage of the company. The more production there is the less costly would be the average cost for each unit.

Reference

Lister, J. (2015). Examples of Explicit & Implicit Business Transactions. Retrieved from http://smallbusiness.chron.com/examples-explicit-implicit-business-transactions-37484.html