Average Cost Curves

Case Study
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The Acme Lawn Mower Company has solidified the design of its revolutionary new mower. The revolutionary all wheel drive mower has been well accepted by the marketplace and they are in a position to sell all they can manufacture. They are ramping up production levels and will soon approach full capacity.


These critical business decisions will be made with the help of Average Cost Curves. These graphs will convey information about optimum production levels and the most beneficial expansion scheme. Total Average Cost is the average fixed cost plus the average variable cost. The Short Run Average Cost (SRAC) is the average cost of the product when at least one input variable remains fixed. This is usually the building or the plant used in manufacturing. The Long Run Average Cost (LRAC) is the average cost over a longer time period when all input variables have changed. It takes into account new plants, buildings, and large capital investments. Though these curves will vary depending on the individual product and situation, for a successful business they will almost always assume the same general shape. The shape of the SRAC curve and the LRAC curve are influenced by the changing input variables plotted against differing production levels. As Acme begins production, the cost of the first few units is heavily influenced by the fixed costs such as the lease on the building. The graph will start at a high average cost per unit. As they increase production levels, the fixed costs become spread out over more units and the SRAC begins to fall. ...
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