EContent 11 2023 02 02 12 16 38 Costanalysisclasspptx 2023 01 05 11 25 21

Wal-Mart stores Inc
• Wal-Mart Stores, Inc., doing business as Walmart,

• It is an American multinational retailing corporation
that operates as a chain of hypermarkets, discount
department stores, and grocery stores.
The secret of success: Everyday low prices
They source products from low-wage foreign markets
and cheap domestic suppliers
Worlds 28th GDP worth is its turnover ( $485 billion)
McDonald’s
• The restaurant industry is known for yielding low
margins that can make it difficult to compete with
a cost-leadership marketing strategy
• Basic food and meals at low prices
• They keep their prices low by Applying the concept
of division of labor
• Allow to hire and train inexperienced employees
rather than trained cooks
• It relies on a few managers who typically earn
higher wages
• These staff savings allow the company to offer its
food for bargain prices
IKEA
• IKEA is a multinational group, headquartered in the
Netherlands, that designs and sells ready-to-assemble
furniture, kitchen appliances, and home accessories. It has
been the world's largest furniture retailer since at least 2008.
• Revolutionize the furniture industry
• Offer cheaper and more stylish furniture
• It is possible to source its products
• It does not assemble or deliver furniture
• This is less convenient than traditional retailers
• Customers collect the furniture from the warehouse
and assemble them on their own
It allows IKEA to offer lower prices that attract customer
South west airlines
• Southwest Airlines Co. is a major U.S. airline and the world's
largest low-cost carrier headquartered in Dallas, Texas
• The airline industry
• It has been an industry where profits are hard to come by
without charging high ticket prices
• South west airlines challenged this concept by marketing itself
as a low cost leader
• It is possible by low-cost
• Being more efficient than traditional airlines
• Minimize the time that their planes spend on the surface in
order to keep them flying and keep profits up
Significance of cost analysis
•Provide a floor to product pricing

•To measure the profitability of operation
•To distribute compensation among FOP
•To assess feasibility of proposed project
• Lease/Buy decision/make decisions
•Least cost combinations of same level of output
•Whether to accept or reject a particular order
Different cost concepts
1. Economic cost :
Together of cost of implicit and explicit costs
Explicit cost
• Cost associated with remuneration for hired
factors of production is known as Explicit cost
• For ex :
• A farmer cultivation :
• Land Rent, fertilizers, workers’ wages, seeds,
irrigation taxes, and others
• Implicit cost:
Self-owned factors employed in the
organization and that cost are computed on
the basis of opportunity cost
Ex: implicit rent, implicit interest
Decision-making perspective:
4. Opportunity cost:
The reward for the next best alternative of any
factor is known as opportunity cost
Ex: A professor converted into a consultant what
he is going to receive as remuneration is an
opportunity cost of a professor
5. Normal Profit:
opportunity cost of owners own time spend in
the enterprise is known as normal profit
It is nothing implicit cost of entrepreneurial skills
is known as Normal profit
It is a part of total implicit cost , misleading the
term normal profit , it is a cost concept
Decision perspective
6.Historical cost vs. Replacement cost:
Cost of procurement of any thing at the time of
purchase is known as a historical cost
If the same is purchase in the market today is known
as a replacement cost
Decision making :
Historical cost is for Book keeping
Replacement cost is meant for decision making
Ex: Price offer to the customer
7. Incremental and sunk cost:
The cost associated with a particular decision is
known as the incremental cost
Ex: start an evening college in addition to regular
classes
The cost associated irrespective of the decision is
known as the sunk cost
Ex: Building cost irrespective of starting evening
classes or not.
Ex: consultancy fee for changing the production
pattern
8. Fixed cost variable cost:
costs that are not associated with the level of
production are known as the fixed cost
Ex: Rent, permanent employees’ salaries,
interest on borrowed capital
Costs which can vary depending on the level
of production is known for variable costs
Ex: Raw material, temporary workers’ wages,
seasonal financing costs,
9. Separable and common costs:
The cost which can be attributed to a product;
department or process is the separable costs
Ex: professor salary in Management
Costs that can not be attributable to any one
specific product or service are known as
common costs
Ex: Salary of vice chancellor
Decision Perspective:
10. Private and social costs
Cost incurred by individual firm which include
explicit and implicit costs
Cost incurred by the society as a whole :
which depends on inclusions/ exclusions and
externalities
Ex: inclusions are taxes
Exclusions are subsidies
Externalities include air, water and sound
pollution cost as a whole society.
• Total, Average, and Marginal costs:
Total cost = implicit and explicit cost
Average cost: cost per unit = total cost/output
Marginal cost: change in total cost as output changes in one
unit
Decision making :
Total cost for Break-even analysis
The average cost for estimating profit per unit
The marginal cost for deciding the optimum level of output
and whether to accept the offer or not in the short term
Cost out put relationship
• Short run: At least one factor supply remains
the same to produce.
Costs associated with a particular level of
Production capacity
• Long run: All factors are freely available to
change the output
Costs associated with all production capacities
Short-run Cost function
C=f( X, Pf, T, K)
Where
C= cost
X= quantity of output
Pf= Prices of factors of production
T= technology
K= fixed factor- capital ( which can not be changed)
Long run cost function:
• C=f( X, Pf, T)
Where
C= cost
X= Quantity of output
Pf= Prices of factors of production
T= technology
Note: no constrain of changing capital in the
long run
Short run cost out put relationship
Fixed cost and output :
Fixed cost does not vary with the output= STFC
C
o STFC
s
T output (quantity)
The large out put produced, the lower will be the fixed cost per unit =
SAFC
cost SAFC
output (quantity)
Marginal fixed cost always be zero =SMFC
Continue………
Variable cost and out put:
• Total variable cost increases as output increases
• It may not increases similarly for one unit increase in output
As economic theory States that:
• Beginning as output increases , TVC increases at a decreasing rate
• Latter increases at a constant rate
• Further increase in output leads to increasing at an increasing rate
There is an operation of law of diminishing return:
* Initially when more and more variable factor of production used along
with the fixed factor of production , the marginal product from the
variable factor First increases , then remain constant finally start
diminishing
Total variable cost curve Is like an inverse S shaped
Cost
Output (quantity)
• Continue….
Average variable cost : TVC/Q
The curve will first fall as output increases
Then remain constant for some output range
And it will eventually rise with every increase in output
It is like ‘U’ Shape
AVC curve in short run
Total cost and output relationship
• Total cost = TFC+TVC
• One of the component of TFC is remain constant
• Where as TVC increasing when the out put
increases
• The rate of change in TC follows as same trend
in TVC
• TC curve is parallel to TVC curve
• TC curve cut at a positive point of cost axis,
which equals to TFC
Total cost- output in short run
Marginal cost in short run
• Marginal cost is the additional cost of producing an additional one unit of
output
• If the revenue gained from producing more units of a good or service is less
than the marginal cost, the unit should not be produced at all, since it will
cause the company to lose money.
• Marginal cost is a key concept for making businesses function well since
marginal costs determine how much production is optimal.
• The short-run marginal cost (MC) curve will at first decline and then will go up.
• At some point, it will intersect the average total cost and average variable cost
curves at their minimum points
• The marginal cost curve is usually U-shaped. Marginal cost is relatively high at
small quantities of output; then as production increases, marginal cost declines
reaches a minimum value, then rises.
• The marginal cost is shown in relation to marginal revenue (MR), the
incremental amount of sales revenue that an additional unit of the product or
service will bring to the firm
ATC,AVC,AFC and MC in short run
Continue….
1. All the three cost curves ATC,AVC and MC curves
first fall, then remain constant and eventually rise
an output rises
2. Change in MC > Change in AVC, hence minimum MC
is an out put lower than where the minimum AVC
3. ATC falls larger range of output than AVC, hence
minimum ATC is larger output than minimum AVC
4. AVC=MC when AVC is least
5. ATC=MC when ATC is least
6. AFC is continuously falling when output increases in
the short run
Case study to understanding TC,TVC,TFC curves and
AVC,AFC,ATC and MC curves and their behavior in short run
Output TFC TVC TC AFC AVC ATC MC
0 240 0 -- --- -- ----
1 240 120
2 240 200
3 240 270
4 240 320
5 240 420
6 240 552
7 240 720
Note : OX axis consider output 1cm=one unit
OY axis consider TC,TVC,TFC ; 1cm =100
A case study on
Short-run cost output relationship
Output TFC TVC TC AFC AVC ATC MC
0 240 0 240 -- --- -- ----
1 240 120 360 240 120 360 120
2 240 200 440 120 100 220 80
3 240 270 510 80 90 170 70
4 240 320 560 60 80 140 50
5 240 420 660 48 84 132 100
6 240 552 792 40 92 132 132
7 240 720 960 34 103 137 168
Draw a cost Analysis with following concepts
in the case
1. Short run Total fixed cost :
2. Short run Total Variable cost
3. Short run Total cost
4. Short run Average fixed cost
5. Short run Average variable cost
6. Short run average total cost
7. Short run marginal cost
Cost output relationship in the long run
• Long run is nothing but long enough time to make all costs
variable including such costs are fixed in short run.
• In the short run variations in the output possible only with in
the range of plant size
• No fixed cost since the firm has sufficient time to fully adopt
its plant
• Costs across all possible production capacities
• In the long run all costs are variable
Three long run costs, which includes
1. Long run total cost
2. Long run Average cost
3. Long run Marginal cost
Long run total cost and output
• Long run total cost curve is tangential to various STC curves
• LTC curve is also known envelop curve
• No point on STC can ever be below the LTC curve
Points to be remember regarding
long run cost output relationship
• Long run Average total cost is tangential to various SATC curves
• LATC curve is also known as envelop curve
• No point on SATC curve can ever be below the LATC curve can
ever be below the LATC curve
• LATC curve is ‘U’ shape or like a dish
• It is because it is lower and lower in the beginning until the
optimum output reached, it is higher when plants larger than
the optimum scale
• SATC is also ‘U’ Shape but LATC is flatter
• LATC never cut the SATC , this implies that for any given output,
long run average total cost can not be higher in the long run
than in the short run
Economies and Diseconomies of scale

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Wal-Mart stores Inc

• Wal-Mart Stores, Inc., doing business as Walmart,

•Provide a floor to product pricing

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