Penny, Inc. employs a process costing system. Direct materials are added at the beginning of the process. Here is information ab
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Answer:
When Rhonda hires the worker to wave the sign for one hour per day, the marginal cost is <u>$10</u> and the marginal benefit is <u>$35</u>. When Rhonda hires the worker to wave the sign for two hours per day, the marginal cost of the second hour is <u>$10</u> and the marginal benefit of the second hour is <u>$20</u>.
Explanation:
The marginal cost is a cost in economics used to measure the amount that will be incurred for making an additional unit of a product or rendering an additional unit of a service. It is generally calculated by dividing the difference in the total cost at two different levels of activity by the difference in the corresponding number of products at the two levels. That is,
Since it costs Rhonda $10 per hour the worker waves the sign, it is easy to calculate the total cost at different levels of work. This means 1 hour of waving the sign = $10 × 1 = $10, 2 hours of waving the sign = $10 × 2 = $20, and so on.
Marginal cost for every hour is therefore $10.
The concept also applies to marginal benefit. Benefit here implies revenue from business less cost incurred.
For when the worker waves the sign:
For 0 hour, revenue = $3 (average customer spending) × 50 = $150.
For 1 hour, revenue = $3 × 65 = $195
For 2 hours, revenue = $3 × 75 = $225
Marginal Revenue:
For 1 hour = = $45
For 2 hours = = $30
Therefore, marginal benefit at 1 hour = $45 - $10 = $35
Marginal benefit at 2 hours = $30 - $10 = $20