Theory Of Cost- 2 - Free MCQ Practice Test with solutions, CA Foundation

Cost of Production Calculation

• Fixed Cost = Rs. 5,000
• Variable Cost per unit = Rs. 2
• Number of units = 20

Total Cost of Production

• Total Variable Cost = Variable Cost per unit x Number of units = 2 x 20 = Rs. 40
• Total Cost = Fixed Cost + Total Variable Cost = 5000 + 40 = Rs. 5040

Therefore, the total cost of production of 20 units is Rs. 5040.

Calculating Average Fixed Cost at 8 units

- Given that the average fixed cost at 12 units is Rs. 40.
- To find the average fixed cost at 8 units, we can use the concept of fixed costs being spread over a larger or smaller number of units produced.

Calculation

- Let's assume the total fixed cost at 12 units is Rs. 480 (40 * 12).
- To find the average fixed cost at 8 units, we divide the total fixed cost by the new number of units.
- Average fixed cost at 8 units = Total fixed cost / Number of units = Rs. 480 / 8 = Rs. 60.

Therefore, the average fixed cost at 8 units is Rs. 60. So, the correct answer is option A: Rs. 60.

Option B is correct.

The formula relating average fixed cost and total fixed cost is: AFC = TFC ÷ Q, where AFC is average fixed cost, TFC is total fixed cost and Q is output.

Given AFC = Rs. 30 at Q = 6, so TFC = Rs. 30 × 6 = Rs. 180.

At Q = 4, AFC = TFC ÷ Q = Rs. 180 ÷ 4 = Rs. 45. Therefore the required average fixed cost is Rs. 45.

The total fixed curve is plotted as straight line parallel to the x axis as fixed costs do not change with the level of output produced in the short run.

Average Total Costs = Rs.3 

Average Variable Cost of Rs. 2.50

Average total costs = Average variable cost + Average Fixed Cost

Rs.3 = Rs.2.50 + AFC 

AFC = Rs.3 - Rs.2.5

AFC = Rs.0.5

Average Fixed Cost = Total Fixed Cost/Total Quantity 

Fixed Cost = Rs.400

AFC = Rs.0.5

Total No. of Quantity = Total Fixed Cost/AFC 

Total No. of Quantity = Rs.400/0.5

Total No. of Quantity = 800 units

correct answer is 800 units.

125000-25000-35000 = 65000 = explicit cost.
Total cost = implicit cost + explicit cost.

AFC (Average Fixed Cost) is calculated by dividing the total fixed cost by the quantity of output produced.
Formula: AFC = Total Fixed Cost / Quantity of Output
Fixed costs are those costs that do not change with the level of output, such as rent, salaries, and equipment costs. These costs are incurred even if no output is produced. By dividing the total fixed cost by the quantity of output, you can determine the average fixed cost per unit of output.
AFC = Total fixed cost / Number of units produced AFC
= 15 / 3
AFC = 5
Correct option is A.

Marginal cost = ∆Total cost/∆Output.
At 4 units,
Let the required units be 'x' units at 4 units.
Marginal cost = 30 = (x-80)/(4-2).
30 = (x-80)/2.
30 x 2 = x-80.
60 = x-80.
60+80 = x.
x = 140.
Hence, correct answer is option A.

There are no fixed costs in the long run as all the factors become variable. Fixed cost exists only in short run.

Fixed Cost (FC) = TC at 0 units = 300

AFC = FC / Quantity

AFC at 3 units = 300 / 3 = 100

 Long-run average cost is the cost per unit of output reasonable when all factors of production are variable. Long-Run Average cost is of 'U' shaped because of returns to scale. In the establishment, firms enjoy lots of economies to scale so its cost curve is downward sloping. Increasing income to scale applies when firms enjoy economies to scale. In the beginning, the factors of production are not exhausted.