Part 1
The relevant costs in making expansion decision are the fixed and variable costs as well as the costs of forgone alternative. The Opportunity costs refer to the profit that could be realized if the plant expanded into the general pastry market. The actual costs incurred in the expansion of the business are the cost of machinery, new building and variable cost of production i.e. additional ingredients and workers. The short run costs are costs that will be incurred to ensure the business increases production to utilize its idle production capacity. These costs include the cost of ingredients and additional labor. In the short run, the fixed costs do not change e.g. the cost of machinery, the cost of labor in departments that will not be expanded when the business is expanded and cost of land and building. Long run costs are all the fixed and variable costs that will be incurred in expansion of the business i.e. cost of machinery, building, land, labor, ingredients
In the short run, the decision making criteria is ensuring that variable cost per unit fall below the price per unit. In the long run, decision-making criteria should involve the opportunity costs as well the actual cost incurred in production i.e. the revenue realized should cover all the costs. In this case, the firm should produce if it can make an economic profit (Singh, 2013).
Part 2
Accounting profit considers the actual costs incurred in carrying out the business i.e. It is calculated by subtracting costs incurred from revenue. However, economic profit is calculated by subtracting both implicit and explicit costs from the revenue realized.
Economic profit = Accounting profit – opportunity cost
= 1000- 600 = $400
Assumption made
In calculating accounting profit interest payable is an expense that is included as part of the business expense. In this case, it is assumed that the accountant made this consideration (Singh, 2013).
References
Singh, S. R. (2013). Micro economics. New Delhi: APH Pub. Corp.
