Question

Difficulty: MediumShort-Run Cost Concepts and Calculations

A furniture manufacturing firm operating in the short run produces 2020 wooden dining sets. At this level of output, the firm's Total Cost (TC\text{TC}) is 800,000\text{₦}800,000 and its Average Fixed Cost (AFC\text{AFC}) is 15,000\text{₦}15,000 per set. What is the firm's Total Variable Cost (TVC\text{TVC})?

  1. A
    300,000\text{₦}300,000
  2. 500,000\text{₦}500,000Answer
  3. C
    785,000\text{₦}785,000
  4. D
    25,000\text{₦}25,000

Answer

The firm's Total Variable Cost (TVC) is 500,000\text{₦}500,000.
Total Cost (TC) is the sum of Total Fixed Cost (TFC) and Total Variable Cost (TVC). To find TFC, multiply Average Fixed Cost (AFC) by quantity (Q): 15,000×20=300,000\text{₦}15,000 \times 20 = \text{₦}300,000. Subtracting TFC from TC gives TVC=800,000300,000=500,000\text{TVC} = \text{₦}800,000 - \text{₦}300,000 = \text{₦}500,000.

Step-by-Step Solution

1
Calculate Total Fixed Cost (TFC) using Average Fixed Cost (AFC) and total quantity produced (Q)
TFC=AFC×Q=15,000×20=300,000\text{TFC} = \text{AFC} \times Q = \text{₦}15,000 \times 20 = \text{₦}300,000
Average Fixed Cost is Total Fixed Cost divided by output, so multiplying AFC by Q gives total fixed expenditure.
2
Subtract Total Fixed Cost (TFC) from Total Cost (TC) to determine Total Variable Cost (TVC)
TVC=TCTFC=800,000300,000=500,000\text{TVC} = \text{TC} - \text{TFC} = \text{₦}800,000 - \text{₦}300,000 = \text{₦}500,000
In the short run, Total Cost consists of Total Fixed Cost plus Total Variable Cost (TC=TFC+TVC\text{TC} = \text{TFC} + \text{TVC}).

Key Concept

Short-run total cost decomposition (TC = TFC + TVC) and fixed cost relationships (TFC = AFC × Q)
Estimated Time:1m 30s
Rate this question