The Konyv Printing Co wants to calculate the cost of adding

The Konyv Printing Co. wants to calculate the cost of adding a third machine. Comment on the following statement made by the company accountant: \"If we add a third printing press, our total costs will increase from $870 to $960. Therefore the marginal cost of the third machine is $960/3-$320.\" Is the accountant correct? Explain your reasoning

Solution

Solution:

The accountant has applied an incorrect approach as has calculated the marginal cost by dividing the total cost by total inputs used. However the correct approach should have been change in costs/change in quantity to know the marginal cost of third machine. If the selling price for a product exceeds the marginal cost, then earnings will be more than the added cost thus a valid reason of adding an additional machine.