TAN, HERDRETH MEIDEL P.

BSMA BLOCK A (TTH 12:00 – 1:30PM)

1. List down 2 examples of implicit and explicit costs of a) Travel & tours/ car
rental and b) catering company. (10 pts) Note: Ensure no similar answers with
your classmates. Should there be similar answers, those identified students will
have 0 points for this question.  Assumptions are open depending on examples
listed. Just provide explanation for answers listed.

A.) Travel & Tours or Car Rentals

Implicit Cost:
(1) Depreciation of mechanical tools used for repairs of cars
(2) cost of seat covers

*These are both implicit costs since these aren’t shown as a separate expense.

Explicit Cost:
(1) Detection/GPS Systems expense
(2) Dash cam systems expense

*These are both explicit costs since it affects the company’s profitability. In our family
business, we pay monthly expenses for such since the LTFRB and DOT continuously
check if these items are fully functioning and operating under authorized sellers. Using
their systems, would require a monthly subscription fee.

B.) Catering Company

Implicit Cost:
(1) Culinary training for Chef
(2) Research of new table designs for catering

*These are both implicit costs since trainings of Chef and the research of new table
designs for catering aren’t shown as a separate expense

Explicit Cost:
(1) Transportation/Delivery truck equipment
(2) Salary of Delivery Man
*Both are explicit cost since both affect the company’s profitability.

2.  Identify 2 sunk costs in the a) Laundry shop and b) Procter & Gamble corp. (10
pts) Note: Ensure no similar answers with your classmates. Should there be
similar answers, those identified students will have 0 points for this question.
Assumptions are open depending on examples listed. Just provide explanation
for answers listed.

A.) Laundry Shop

Sunk Cost:
(1) Cost of tiles in Laundry Shop (replacement of broken tiles)
(2) Cost of water pipes in washing machine (replacement of broken pipes)

*Cost of tiles in Laundry Shop and cost of water pipes in washing machine are both
sunk costs since both could not be recovered and isn’t used in the future decisions of
the company.

B.) Proctor & Gamble Corp

Sunk Cost:
(1) Advertising expense for new diaper product
(2) Installation of a new (software) system for new product

*Advertising expense for a new diaper product and installation of a new software
system for new product is a sunk cost since it can no longer recover the money that has
been spent and its not used for the future decisions of the company.

3.  How should sunk costs be treated in making decisions. Explain examples
cited above based on the assumptions you created. (5pts)
In making decisions, sunk cost is a cost that is not part of your future choices
since it has already been incurred and could not be recovered. You should only
consider costs that are relevant.

With regards to the laundry shop, its sunk costs include (1) Cost of tiles in
Laundry Shop (2) Cost of water pipes in washing machine. In Proctor & Gamble Corp.,
the sunk costs are Advertising expense for new diaper product and installation of a new
(software) system for new product. These are sunk costs since the money that have
been spent cannot be recovered and could not be considered in their future decisions.
4.  Differentiate short run and long run production decision, short run costs and
long run costs, short run cost curve, long run cost curve. (20 pts)

Short run production decision, only variable costs and revenue affect the short run
profits and fixed costs are not impactful in decisions. On the other hand, Long run
production decision costs and factors of production are variable.

Short run costs are costs that are incurred and couldn’t be used again. It is short-term
with regards to production process, and they are affected by variable costs and
revenues. They would increase and decrease based on the rate of production and the
variable cost. It has both fixed and variable factors. While Long Run Costs is
accumulated when organizations change their production levels because of economic
profits or losses. It is a combination of outputs that an organization produces that would
result in the desired quantity of the goods at the lowest price. It has no fixed factor. The
general price level, wages, expectations would adjust fully to the state of the economy.

Short Run Cost curve is where the minimum cost impact of output changes is shown. It
reflects the best or least cost input combination with regards to producing output in fixed
situations. In this, wage rates, interest rates and other operating conditions are held
constant. On the other hand, Long Run cost curve is the cost per unit of output and is
calculated through the division and by the quantity of output.

5.  Explain the difference between the economic relevance of: a) fixed costs, b)
sunk costs, c) variable costs and d) marginal costs. (5pts)

Fixed Costs - Fixed costs can be a contributor to better economies of scale because
fixed costs can decrease per unit when larger quantities are produced; are constant
whether the services or product are produced or not.
Sunk Costs – costs that are incurred and could not be recovered. It would guide the
organization with regards to the decision making.
Variable Costs – costs that differentiate depending on the company’s volume of
production. It would help identify as to how many products should be produced.
Marginal Costs – is a cost that identifies the change in the total production cost. It
maximizes its profits.

6.  Identify at least 5 fixed and variable costs in the short run and long run for a)
book store and b) publishing company. (10 pts) Note: Ensure no similar answers
with your classmates. Should there be similar answers, those identified students
will have 0 points for this question. Assumptions are open depending on
examples listed. Just provide explanation for answers listed.
A.) Bookstore

(Short run)

Fixed costs:
(1) Loan Payments for Fixtures (debt payments)
(2) COVID prevention tools Expense (Alcohol, Mask for employees)
(3) Salaries wages of bookstore owner
(4) Internet Service Expense
(5) Employee Benefits Expense

*All of the costs mentioned above are fixed costs because these costs are constant and
do not change whether there is an increase or decrease with the number of goods and
services produced.

Variable costs:
(1) Cost of Packaging Materials
(2) Cost of Staple wires for staplers (Used by Cashiers for packing)
(3) Cost of Acrylic shield for cashier’s counter (for COVID prevention)
(4) Cost of Receipt Papers
(5) Cost of Red Ballpens

*All of the costs mentioned above are variable costs because these costs are ever
changing and dependent to the production volume of the company. Packaging
materials such as plastics/paperbags for customers if they buy and item, staple wires
used for sealing these paperbags, Acrylic shield for cover protection against COVID,
Receipt Papers that’s used by cashiers, and red ballpens to use for writing for cashiers
to check the number of items are all variable since they would depend as to the number
of items the bookstore is having.

(Long run)

Fixed costs: N/A since all costs are considered variable costs
Variable costs:
(1) Electricity used for extra holiday hours
(2) Packaging Material container used for packing items e.g. plastic, paper bag
Expense (3) Credit card Fees
(4) Freight charges (for transportation of books)
(5) Redistributor of Dayag Textbooks
*These are all variable costs since these would depend on the production volume of the
company. Electricity used for extra holiday hours is variable since it is dependent to the
number of hours the store would be operating. Credit card fees is also included since, if
more customers purchase (using credit card) then more fees will be received.

B.) Publishing Company

(Short run)

Fixed costs:
(1) Salaries and Wages of owner of Publishing Company
(2) Loan payment for Office Equipment (Debt Payments)
(3) Salaries and Wages of Driver (For owner’s Transportation)
(4) Rent Expense of Office space in Mabolo Cebu
(5) Cost of Maintenance of IT Software

*All of the costs mentioned above are fixed costs because these costs are constant and
do not change whether there is an increase or decrease with the number of goods and
services produced.

Variable costs:
(1) Cost of Printing of books via third party
(2) Cost of pens
(3) Cost of white board pens
(4) Fuel cost used by owner to transport published books
(5) Cost of Folders (used in filing documents)

*All of the costs mentioned above are variable costs because these costs are ever
changing and dependent to the production volume of the company.

(Long run)

Fixed costs: N/A since all costs are considered variable costs
Variable costs:
(1) Printing of newly published book from a renowned Author
(2) Brunch meeting with newly acquired Author
(3) Training for newly hired secretary
(4) Cost of plane flight for meeting with newly acquired Author
(5) Cost of security for meet and greet of newly acquired Author
*All of the costs mentioned above are variable costs because these costs are ever
changing and dependent to the production volume of the company. Printing of newly
published book from a renowned author is variable since it would depend on the
production volume of the company. Brunch meeting, training for newly hired secretary,
cost of plane flight for meeting with newly acquired author, cost of security for meet and
greet of newly acquired author are variable since these costs are ever changing and are
dependent.