Final answer:
To develop a cost estimating equation for monthly production costs, consider the high-and low-volume months and the average variable cost calculated by dividing the variable cost by the total output. The equation should reflect the U-shaped relationship between average variable costs and output. If the firm's average variable cost of production is lower than the market price, it can make profits excluding fixed costs.
Step-by-step explanation:
To develop a cost estimating equation for monthly production costs, you need to consider the high-and low-volume months as well as the average variable cost and total output at each level of output. The equation should be based on the average variable cost, which is calculated by dividing the variable cost by the total output. This calculation helps determine the relationship between production costs and output. Average variable costs are typically U-shaped on a graph, meaning they decrease initially, reach a minimum point, and then increase as output increases.
To ignore fixed costs and focus only on the variable costs, the firm's average variable cost of production should be lower than the market price. This indicates that the firm would be earning profits without considering fixed costs. Taking all these factors into consideration, you can develop the cost estimating equation for monthly production costs.