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ESTIMATEDPRODUCTION
FUNCTION, COSTCONCEPTS AND
BREAK EVENANALYSIS
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PRODUCTIONTHEORY
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Production is the process of transforming the
inputs like land labour, capital and
organization into output
Production theory speaks of the relation
between input and output
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Production function
Functional and technical relationship
between input and output
Generally written as Q = (K, L, etc)
Where Q= qty of output produced
K,L,etc = factors of production
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Characteristics of production Function.
Assumptions of production function.
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Managerial use of ProductionFunction
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Cobb-Douglas ProductionFunction It is stated as
Q = KLaC(1-a)
where Q= output
L= qty of labour employed
C= qty of capital employed
K is positive constanta is positive fraction
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Laws of production
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Law of Diminishing Returnsor Law of Variable
Proportions Assumptions of Law of returns of scale
1) The production technology remaims
unchanged
2) The variable factor is homogeneous
3) Any one factor is constant
4) The fixed factor is indivisible
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Causes for the Operation of the Law of
Diminishing Returns
1) Wrong combination of Inputs
2) Scarcity of Certain Factors
3) Imperfect Substitutes
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Law of diminishing Returnsand Business decisions
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Law of returns to Scale
Returns to scale
Increasing Returns to Scale
Constant Returns to Scale
Decreasing Returns to Scale
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COST
concepts
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Various Concepts of Cost
Fixed and Variable Costs
Short-term and Long-term Costs
opportunity Cost and Outlay Costs
Past and Future Costs
Out-of-pocket and Book Costs
Incremental and Sunk Costs
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Escapable (avoidable) and Unavoidable
Costs
Traceable and Common Costs
Explicit and Implicit or Imputed Costs
Replacement and Historical Costs
Business and Full Costs
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Break-Even
Analysis Break-Even Analysis is an analyticaltechnique used to study the relationship
between the total cost, revenue and the total
cost, total revenue and the total profit
Break-Even analysis helps to determine the
probable profit at any level of production
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Break-Even
Point It is the point of no profit, no loss
Sales at break-even point = Fixed cost + Variable
Cost
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Cost and Sales at Various Levelsof Output
Output
Total Revenue(price per unit
Rs 5)
AR TFC TVC TC AC
0 0 0 50 0 50 0
10 50 5 50 40 90 920 100 5 50 80 130 6.5
30 150 5 50 120 170 5.7
40 200 5 50 160 210 5.2
50 250 5 50 200 250 5
60 300 5 50 240 290 4.8
70 350 5 50 280 330 4.7
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Calculation of Break-Even Poinin units
Break-even = Total fixed expenses
point in units selling price per unit Variable cost per
unit
B.E.P (IN UNITS) = F OR F
SP- VC C
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CONTRIBUTION
C = Selling price Variable Cost
C = Fixed Cost + Profit
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Uses of Break-Even
Analysis
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Graphical presentation ofBreak-Even Analysis
OUTPUT UNITS
COS
T/REVEN
UE(R
s)
TFC LINE
B.E Sales
TC
TR
Margin of safety (units)Marginofsafe
ty(Rs)
50
50
0
250
Loss Area
Angle of
Incidence
B
B,Eun
i ts
Profit Area
y
x
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Assumptions of Break-Even
Analysis
Limitations of Break-Even
Analysis
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