Question

You have been working for home-building companies for a number of years. You enjoy construction work, and now you want to start your own home-building company that you will run yourself You quit your previous job that had been paying $40,000 per year. You have $40,000 in your savings account that you withdraw to start this company. The savings account had been paying you 5% interest. Because the $40,000 from your savings is not enough to start the company, you also borrow $2,300,000 from the bank. (The bank manager is willing to loan you such a large amount because he knows of your reputation and experience in the home-building industry) You use the money to hire workers and buy the tools, machinery, and raw materials with which you will build houses. The cost per worker is $20,000 per year. In your first year, you plan to hire 48 workers to do the construction work, which means that the annual labor cost of your company will be $960,000 (48 x $20,000), With 48 workers, your company can build seven houses. You must also buy raw materials-land, wood, nails, plasterboard, and so forth. Each house requires $20,000 worth of raw materials. The cost of raw materials for seven houses is $140,000 (7 x $20,000). Finally, the bank charges 6% interest on your loan. The interest cost is $138,000 (6% of$2.300,000). 1.5. What are the total fixed costs for your construction company? A. $960,000 B. $42,000 c. $180,000 D. $140,000 E. $1,280,000

Answer 1

The total fixed costs for the construction company is $960000.

Step-by-step explanation:

Total fixed costs are those costs that are costs that do not change due to production of a product for example in this case we have a cost of raw materials for building 7 houses which is $140000 which variate with the number of houses built and this cost is a variable cost of building a house. The salary for workers is a fixed cost as no matter how many houses the workers build they will still get their salaries of $20000 per worker per year which is in total $960000 for all the workers in the company. Total fixed costs are those costs that are directly involved with the producing of a product but do not change and which in this case it is the salary of workers as also the interest on the loan will be a constant once off amount and is not directly involved in the production of houses.

Answer 2

Correct option is D $140,000.

Step-by-step explanation:

Fixed cost of production is the unrelated to the level of production which remains constant for any number of units of output produced. This accrues to a firm for paying off its fixed factors. Here the fixed payment is $140,000 for 7 houses.