KESHAV MEMORIAL COLLEGE OF

ENGINEERING

Business Economics
&
Financial Analysis

Unit 3 Notes

Study Material:
Complied & Prepared by
SANDEEP S KALE
(Asst. Professor – Dept. of MBA)

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UNIT - III: Production, Cost, Market Structures & Pricing
Production Analysis: Factors of Production, Production Function, Production Function with
one variable input, two variable inputs, Returns to Scale, Different Types of Production
Functions.
Cost analysis: Types of Costs, Short run and Long run Cost Functions.
Market Structures: Nature of Competition, Features of Perfect competition, Monopoly,
Oligopoly, and Monopolistic Competition.
Pricing: Types of Pricing, Product Life Cycle based Pricing, Break Even Analysis, and Cost
Volume Profit Analysis.
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Production – Meaning
Production refers to the process of creating goods or services by combining various inputs
such as labour, raw materials, machinery, and technology. In simple terms, Production is the
act of making something useful that satisfies human wants or needs.

Types of Production:

1. Primary Production – Extracting natural resources (e.g., farming, fishing, and mining).
2. Secondary Production – Manufacturing or processing raw materials (e.g., factory work,
construction).
3. Tertiary Production – Providing services (e.g., teaching, banking, retail).

Key Elements of Production:

 Inputs: Resources like land, labour, capital, and entrepreneurship.

 Process: The method of converting inputs into outputs.
 Output: The final good or service produced.

Factors of Production - Factors of Production are the basic resources used to produce
goods and services. They are traditionally classified into four main categories:

 Land: This includes all natural resources used in production such as soil, water, minerals,
forests, and climate. It is a passive factor and is limited in supply. Rent is the income
earned from land.
 Labour: Refers to human effort (both physical and mental) used in the production
process. It includes all types of workers from manual labourers to professionals. Wages or
salaries are the rewards for labour.
 Capital: Represents the amount of money and material used to produce goods and
services, such as tools, machinery, buildings, and technology. It increases productivity
and earns interest as its reward.
 Entrepreneurship: The entrepreneur is the person who organizes the other factors, takes
business risks, makes decisions, and innovates. The reward for entrepreneurship is profit.

Each factor plays a unique and essential role in production, and efficient use of all four leads
to economic growth and development.

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Production Function

Definition:
A production function shows the relationship between inputs and output. It indicates how
much output (goods or services) can be produced using different combinations of inputs (like
labour, capital, land, etc.), given the current technology.

Mathematical Expression:
Typically written as:
Q = f (L, K)
Where Q is output, L is labour, and K is capital. This equation describes how output changes
as input levels change.

Assumptions of Production Function

 Both inputs and outputs are divisible.
 There are only two factors of production, i.e., land (Variable element) and capital
(Fixed element).
 Factors of production are imperfect substitutes.
 Technology is constant.

Types of Production Function

Production function on the basis of the time period can be divided into two
categories: Short Run Production Function and Long Run Production Function. In these
production functions, the combination and behaviour of variable factors and fixed factors
are different.
1. Short Run Production Function: Short Run is a period of time where output can only
be changed by changing the level of variable inputs. In the short run, some factors are
variable and some are fixed. Fixed factors remain constant in the short run like land,
capital, plant, machinery, etc. Production can be raised by only increasing the level of
variable inputs like labour. Therefore, the situation where the output is increased by only
increasing the variable factors of input and keeping the fixed factors constant is termed
as Short Run Production Function. The 'Law of Variable Proportions’ explains this
relationship.
2. Long Run Production Function: Long Run is a span of time where the output can be
increased by increasing all the factors of production whether it is fixed (land, capital,
plant, machinery, etc.) or variable (labour). Long run is enough time to alter all the factors
of production. All factors are said to be variable in the long run. Therefore, the situation
where the output is increased by increasing all the inputs simultaneously and in the same
proportion is termed Long Run Production Function. The 'Law of Returns to Scale’
explains this relationship.

Based on Mathematical Form

1. Cobb-Douglas Production Function: Cobb-Douglas production function refers to the

production function in which one input can be substituted by other but to a limited
extent. For example, capital and labour can be used as a substitute of each other, but to a
limited extent only.

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Cobb-Douglas production function can be expressed as follows:

Q = AKaLb

Where, A = positive constant

a and b = positive fractions

b=1–a

Therefore, Cobb- Douglas production function can also be expressed as follows:

Q = akaL1-a

The characteristics of Cobb- Douglas production function are as follows:

i. Makes it possible to change the algebraic form in log linear form.

ii. Makes it possible to change the algebraic form in log linear form.

iii. Acts as a homogeneous production function, whose degree can be calculated by the
value obtained after adding values of a and b. If the resultant value of a + b is 1, it
implies that the degree of homogeneity is 1 and indicates the constant returns to scale.

iv. Makes use of parameters a and b, which signifies the elasticity’ coefficients of output
for inputs, labour and capital, respectively. Output elasticity coefficient refers to the
change produced in output due to change in capital while keeping labour at constant.

v. Represents that there would be no production at zero cost.

2. Leontief Production Function: Leontief production function uses fixed proportion of inputs
having no substitutability between them. It is regarded as the limiting case for constant
elasticity of substitution.

The production function can be expressed as follows:

q= min (z 1/a, Z2/b)

Where, q = quantity of output produced

Z1 = utilized quantity of input 1

Z2 = utilized quantity of input 2

a and b = constants

For example, tyres and steering wheels are used for producing cars. In such case, the
production function can be as follows:

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Q = min (z1/a, Z2/b)

Q = min (number of tyres used, number of steering used).

3. CES Production Function: CES stands for Constant Elasticity Substitution. CES
production function shows a constant change produced in the output due to change in
input of production.

It can be represented as follows:

Q = A [aKβ + (1-a) L-β]-1/β
Or,
Q = A [aL-β + (1-a) K-β]-1/β
CES has the homogeneity degree of 1 that implies that output would be increased with
the increase in inputs.

Production Function with one Variable Input.

A Production Function with one variable input is a mathematical representation of the
relationship between the quantity of output produced and the quantity of one variable input,
holding all other factors constant. In simpler terms, it describes how much output can be
produced from varying amounts of a single input, typically labour (L), while assuming that
all other inputs (like capital or land) are fixed.

In the context of economics, the production function can be written as:

Q = f (L)

Where:

 Q is the quantity of output produced,

 F is the functional relationship (or the function itself),
 L represents the variable input (often labour, though it could represent other inputs
like raw materials, depending on the scenario).

Assumptions of the Law: The law is based upon the following assumptions:
1. Only one factor is varied.
2. The scale of output is unchanged.
3. The technique of production is unchanged.
4. All units of factor input varied are homogeneous

Key Concept of this function:

Law of Diminishing Marginal Returns: This is also known as Law of Variable Proportions.
One of the most important properties of a production function with one variable input is the
principle of Diminishing Marginal Returns. This principle states that as more of the
variable input is added, holding other inputs constant, the additional output produced by each

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additional unit of input will eventually decline. Initially, when the quantity of the input is
low, adding more input may significantly increase output, but after a certain point, each
additional unit of input will contribute less to total output. This decline in the marginal
productivity of the input is a crucial concept in microeconomics.

Mathematically, the marginal product of labour (MPL) can be defined as the first derivative
of the production function:

MPL= dQdL

If the MPL is decreasing, it indicates that diminishing returns are at play.

This Law can be better understood from the 3 stages of this law. The behaviour of the Output
when the varying quantity of one factor is combined with a fixed quantity of the other can be
divided in to three district stages

From the above graph, the law of variable proportions operates in three stages. In the
first stage, total product increases at an increasing rate. The marginal product in this
stage increases at an increasing rate resulting in a greater increase in total product. The
average product also increases. This stage continues up to the point where average
product is equal to marginal product. The law of increasing returns is in operation at this
stage. The law of diminishing returns starts operating from the second stage onwards.
At the second stage total product increases only at a diminishing rate. The average product

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also declines. The second stage comes to an end where total product becomes maximum
and marginal product becomes zero. The marginal product becomes negative in the third
stage. Therefore, the total product also declines. The average product continues to
decline.

We can sum up the above relationship thus when ‘AP’ is rising, ‘MP’ rises more than
‘AP’; When ‘AP’ is maximum and constant, ‘MP’ becomes equal to ‘AP’ when ‘AP’
starts falling, ‘MP’ falls faster than ‘AP’.

Thus, the total product, marginal product and average product pass through three phases,
viz., increasing diminishing and negative returns stage. The law of variable proportion is
nothing but the combination of the law of increasing and demising returns.

Production Function with two Variable Inputs

In managerial economics, the production function is a concept that describes the relationship
between inputs (factors of production) and the output of a firm. When considering a
production function with two variable inputs, the focus is on understanding how changes in
the quantities of two inputs affect the level of output.

The production function with two variable inputs examines the relationship between changes
in the quantities of two inputs and their impact on the level of output. While other inputs are
assumed to remain constant, the two variable inputs can be adjusted to observe their
combined effect on production. For the analysis of production function with two variable
factors, we make use of the concept called Isoquants.

Isoquants, which are also called equal product curves, represents all those factor
combinations that are capable of producing the same level of output. The term isoquant
has its origin from two words “iso” and “quantus”. ‘iso’is a Greek word meaning ‘equal’ and
‘quantus’ is a Latin word meaning ‘quantity’. Isoquant therefore, means equal quantity.
Therefore, an isoquant curve is also called as iso-product curve or equal product curve or
production indifference (no difference) curve.

Thus, an isoquant shows all possible combinations of two inputs, which are capable of
producing equal or a given level of output. Since each combination yields same output, the
producer becomes indifferent towards these combinations.

Features of an ISOQUANT:
1. Downward sloping:-If one of the inputs is reduced, the other input has to be increased.
There is no question of increase in both the inputs to yield a given output.
2. Don’t touch the axes:- The isoquant touches neither X-axis nor Y-axis, as both inputs are
required to produce a given product. If an isoquant is touching the X-axis, it means output is
possible even by using a factor (Ex: Labour alone without using capital). However, this is
unrealistic.
3. Don’t intersect: - Isoquants representing different levels of output never intersect or touch
or be tangent to each other. If they intersect to each other, they have a common point on them

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which means that the same amount of labour and capital produce two different levels of
output.

The following table clearly explains the concept of an Isoquant:

Imagine a firm can combine labour and capital in different proportions and can maintain
specified level of output say, 10 units of output of a product X. It may combine alternatively
as follows:
In the above table, combination ‘A’ represent 1 unit of capital and 10 units of labour and
produces ‘10’ units of a product. All other combinations in the table are assumed to yield the
same given output of a product say ‘10’units by employing any one of the alternative
combinations of the two factors labour and capital.

If we plot all these combinations on a paper and join them, we will get a curve called Iso-
quant curve as shown below. Labour is on the X-axis and capital is on the Y-axis. IQ is the
Iso-Quant curve which shows all the alternative combinations A, B, C, D which can produce
10 units of a product.

An isoquant is a crucial concept in production theory, serving as a tool to represent all

possible combinations of two inputs that produce the same level of output. Essentially, an
isoquant shows the various ways a producer can substitute one input for another without
affecting the level of production. The term "isoquant" comes from the Greek words isos
(equal) and quant (quantity), which reflects its function of illustrating equal quantities of
output.

Uses of an Isoquant:
1. Understanding Input Substitution: The primary use of an isoquant is to illustrate the
concept of input substitution—the ability of a firm to replace one input with another in
its production process while maintaining the same level of output. For example, a firm
might use more labour and less capital or more capital and less labour, depending on the
situation. The isoquant curve shows all combinations of these inputs that lead to the same
level of output. This helps firms understand their flexibility in adjusting their input mix to
optimize production while keeping output constant.
2. Analysis of Marginal Rate of Technical Substitution (MRTS): Isoquants are closely
related to the concept of the Marginal Rate of Technical Substitution (MRTS), which
refers to the rate at which one input can be substituted for another while keeping output
unchanged. The MRTS is the slope of the isoquant at any given point and can be
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 calculated as the ratio of the marginal product of labour (MPL) to the marginal product of
capital (MPK). The MRTS helps businesses understand how the productivity of one input
compares to another, allowing them to make informed decisions about resource
allocation.
3. Evaluating Returns to Scale:
Isoquants can also be used to analyse returns to scale, which refers to how output changes
when all inputs are increased proportionally. If a firm’s production function is represented
by a set of isoquants, the shape and spacing of these isoquants can indicate the type of
returns to scale the firm experiences. For example:
o Increasing returns to scale: The isoquants become closer together as more inputs
are used, implying that doubling inputs leads to more than double the output.
o Constant returns to scale: The isoquants remain equidistant as inputs increase
proportionally.
o Decreasing returns to scale: The isoquants become more spaced out, indicating
that doubling inputs results in less than double the output.
4. Optimal Input Combination:
Firms can use isoquants to determine the optimal combination of inputs based on cost
constraints. When combined with an isocost line (which represents combinations of
inputs that cost the same amount), isoquants allow firms to find the point where the
isoquant is tangent to the isocost line. This point represents the most cost-efficient
combination of inputs, where the firm is maximizing output for a given budget. The point
of tangency indicates the cost-minimizing input mix, helping firms make decisions about
how to allocate resources efficiently.
5. Production Planning and Decision Making:
Isoquants are useful in production planning because they provide insights into how
changes in input quantities affect production. By analysing isoquants, firms can determine
how they can adjust their production techniques to optimize output given changing input
costs or availability. For example, if the price of labour increases, a firm can look at its
isoquants to see how much more capital might be needed to maintain the same output.
This information is crucial for strategic decisions about investment in labour or capital
and long-term planning.
6. Technological Substitution and Innovation:
Isoquants can also be used to study the impact of technological improvements on the
production process. If new technologies make one input (e.g., capital or labour) more
productive, the isoquants will shift in a way that reflects the improved efficiency of the
production process. Technological changes might lead to the firm being able to produce
the same level of output with fewer inputs or with a different combination of inputs.
Thus, isoquants can help firms understand the potential benefits of adopting new
technologies and how these innovations impact their input choices.
7. Cost Minimization:
Isoquants play a significant role in the cost minimization problem in microeconomics.
Firms aim to produce a given level of output at the lowest possible cost. By combining
the concept of isoquants with isocost lines (which represent different combinations of
inputs for a given total cost), firms can determine the most cost-efficient combination of
inputs. The point where an isoquant is tangent to an isocost line corresponds to the cost-
minimizing combination of inputs.
8. Comparing Different Production Processes:
Isoquants allow firms to compare different production processes or production
techniques. For example, a firm might have two different methods for producing the same
product: one that uses more labour and less capital, and another that uses more capital and

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 less labour. By comparing the isoquants for each method, the firm can determine which
process is more efficient, depending on the costs and availability of labour and capital.
This analysis helps firms optimize their production methods based on the resources they
have available.

Conclusion: The isoquant is a fundamental tool in production theory, offering valuable

insights into the relationships between inputs and output. It aids firms in understanding the
possibilities for input substitution, optimizing input combinations, analysing technological
change, and making cost-effective production decisions. By visualizing how different
combinations of inputs lead to the same level of output, isoquants help firms navigate the
complexities of production processes, optimize efficiency, and respond to changes in input
prices or availability. When used in conjunction with isocost lines, isoquants become
powerful tools for cost minimization and resource allocation, ultimately helping businesses
maximize their output while minimizing production costs.

RETURNS TO SCALE (Long Run Production Function)

A long run production function describes how output changes when all production inputs
(capital, labour, etc.) are varied simultaneously and in the same proportion, reflecting the
firm's ability to adjust its entire scale of operations. This concept is analysed through the law
of returns to scale, which categorizes output changes as increasing, constant, or decreasing
based on proportional input changes. In essence, it is about the flexibility to alter all factors of
production to find the most efficient combination for maximizing output

Key Characteristics
 All Inputs are Variable: In the long run, there is enough time for a firm to change all its
inputs, including fixed factors like machinery and land, as well as variable factors like
labour.
 Adjusting the Scale of Operations: Firms can expand or contract their entire production
scale by changing the quantity of all inputs.
 Returns to Scale: This is the core theory governing the long-run production function,
examining the relationship between proportional increases in all inputs and the resulting
change in output.
 Flexibility: Firms have maximum flexibility to adapt their production processes to the
business environment by adjusting all inputs to achieve optimal output levels.

The Law of Returns to Scale is an economic principle that explains how output
(production) changes when all inputs (factors of production, like labour, capital, and raw
materials) are increased in the same proportion in the long run. Thus, it shows whether
output increases more than, equal to, or less than the increase in inputs. Since all inputs
can be varied in the long run, the law of returns to scale focuses on the relationship
between input size and output size.

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Types of Return to Scale
According to the Law of Returns to Scale, when all the factor inputs are varied in the same
proportions, then the scale of production may take three forms: Increasing Returns to
Scale, Constant Returns to Scale, and Diminishing Returns to Scale.

Increasing Returns to Scale (IRS)

In the first stage of Returns to Scale, the proportionate increase in total output is more than
the proportionate increase in inputs. In simple terms, if all the inputs increase by 100%,
then the increase in output will be more than 100%.
The main reason behind Increasing Returns to Scale is Economies of Large
Scale. Economies mean the benefits because of the large scale of production. Economies
of scale are of two types: viz., Internal Economies and External Economies.
 Internal Economies: A single firm gets these advantages when it expands production.
They reduce the cost per unit for that firm. For example, A large factory can divide
work among workers (specialisation) and hire expert managers.
 External Economies: All firms in an industry enjoy these advantages when the whole
industry grows. They benefit every firm, not just one. For example: Development of
better roads, transport, or supply of raw materials when the industry expands.

Constant Return to Scale (CRS)

In the second stage of Returns to Scale, the proportionate increase in the total output is
equal to the proportionate increase in inputs. In simple terms, if all the inputs increase by
100%, then the increase in output will also be 100%.
Once the firm has achieved the point of optimum capacity, it operates on Constant Returns
to Scale. After the point of optimum capacity, the economies of production are counter
balanced by the diseconomies of production.

Diminishing Returns to Scale (DRS)

In the third stage of Returns to Scale, the proportionate increase in the total output is less
than the proportionate increase in inputs. In simple terms, if all the inputs increase by
100%, then the increase in output will be less than 100%.
The main reason behind Diminishing Returns to Scale is Diseconomies of Large Scale. It
means that the firm has now become so large that it has become difficult to manage its
operations. Diseconomies of Scale are of two types: Internal Diseconomies and External
Diseconomies.
 Internal Diseconomies: Internal Diseconomies means the disadvantages of the large-
scale production that a firm has to suffer because of its own operations. For
example, Technological Diseconomies because to the heavy cost of wear and tear.

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 External Diseconomies: External Diseconomies mean the disadvantages of large-scale
production that all the firms of the industry have to suffer when the industry as a whole
expands. For example, stiff competition, etc.

COST ANALYSIS
Cost – Meaning
Cost refers to the expenses incurred in the production of goods and services. It includes
money spent on raw materials, labour, rent, machinery, and other inputs required to produce a
commodity. Cost analysis helps businesses make pricing, production, and profit decisions.

Cost are very important in business decision making. Cost of production provides the floor to
pricing. It helps manager to take correct decision, such as what price to quote, whether to
place particular order for inputs or not whether to abandon or add a product to the existing
product line and so on.

Determinants of Cost- Factors determining the cost are:

(a) Size of plant: There is an inverse relationship between size of plant and cost. As size of
plant increases, cost falls and vice versa.

(b) Level of Output: There is a direct relationship between output level and cost. More the
level of output, more is the cost (ie. total cost) and vice Versa.

(c) Price of Inputs: There is a direct relationship between price of inputs and cost. As the
price of inputs rises, cost rises and vice versa.

(d) State of technology: More modern and upgraded the technology implies lesser cost and
vice versa.

(e) Management and administrative efficiency: Efficiency and cost are inversely related.
More the efficiency in management and administration better will be the product and less will
be the cost. Cost will increase in case of inefficiencies in management and administration.

Cost Analysis
Cost Analysis is a systematic process used to evaluate the costs associated with a business
activity, project, or decision. It involves identifying, assessing, and comparing all the relevant
costs—both direct and indirect—incurred in the production or delivery of goods and services.

The main objective of cost analysis is to help management understand cost behaviour, control
expenditures, improve efficiency, and support informed decision-making. Costs are typically
categorized into fixed, variable, and semi-variable components, and the analysis often
includes tools such as break-even analysis, marginal costing, and cost-volume-profit analysis.

Cost analysis is vital in budgeting, pricing strategies, outsourcing decisions, and capital
investment evaluations. For example, before launching a new product, a company will
conduct a cost analysis to determine whether the expected revenues will outweigh the total

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costs involved in production, marketing, and distribution. The insights gained through cost
analysis enable organizations to allocate resources more effectively, reduce waste, and
enhance profitability while maintaining competitive pricing and value to customers.

Types of Costs

 Fixed Costs:
Fixed costs are expenses that remain constant regardless of the level of production or
business activity. These costs do not change in the short term, even if output increases or
decreases. Examples include rent, salaries of permanent staff, insurance premiums, and
depreciation of machinery. For instance, a manufacturing company pays ₹50,000 per month
as factory rent whether it produces 100 units or 1,000 units of goods.

 Variable Costs:
Variable costs change in direct proportion to the level of production or service
activity. The more you produce, the higher the total variable cost, and vice versa. Examples
include raw materials, direct labour (if paid per unit), and utility costs based on usage. For
example, if a bakery uses ₹20 worth of ingredients per cake, the total cost of ingredients will
rise as more cakes are baked.

 Semi-Variable Costs (Mixed Costs):

These costs have both fixed and variable components. They remain fixed up to a
certain level of activity and then increase with additional usage. A typical example is a
telephone bill, where a fixed monthly line rental is charged, plus variable charges based on
call duration. Another example is the salary of a salesperson who gets a base salary (fixed)
and commission per sale (variable).

 Direct Costs:
Direct costs can be directly traced to a specific product, service, or department. These
are typically variable in nature but not always. Examples include raw materials, wages of
workers involved in production, and cost of packaging. For instance, the cost of leather used
in manufacturing a pair of shoes is a direct cost for a shoe company.

 Indirect Costs:
Indirect costs are not directly attributable to a specific product or activity. These are
often shared across departments and include overheads such as electricity, administrative
salaries, and maintenance. For example, the salary of the company’s HR manager is an
indirect cost for all departments in the organization.

 Opportunity Costs:
Opportunity cost represents the potential benefit lost when one alternative is chosen
over another. It is not recorded in accounting books but is crucial for decision-making. For
instance, if a company uses its factory to produce Product A instead of Product B, the profit
foregone from Product B is the opportunity cost.

 Outlay Costs:
Out lay costs are as actual costs which are actually incurred by the firm. these are the
payments made for labour, material, plant, building, machinery traveling, transporting etc.,
These are all those expenses appearing in the books of account, hence based on accounting
cost concept.

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 Sunk Costs:
Sunk costs are expenses that have already been incurred and cannot be recovered.
These costs should not influence future business decisions. An example is the money spent
on market research or obsolete machinery. Even if the machinery is no longer usable, its cost
is a sunk cost.

 Controllable and Uncontrollable Costs:

Controllable costs can be influenced or managed by a specific level of management,
such as departmental supplies or staff bonuses. Uncontrollable costs, on the other hand,
cannot be influenced by the manager in question, like national taxation or fixed overheads set
by corporate headquarters.

 Marginal Cost:
Marginal cost is the additional cost incurred in producing one extra unit of a product.
This is critical in pricing and production decisions. For example, if producing 100 units costs
₹10,000 and producing 101 units costs ₹10,090, the marginal cost of the 101st unit is ₹90.

 Imputed Costs (Notional Costs):

These are hypothetical costs that do not involve actual cash outflow but are
considered for decision-making purposes. An example is the notional rent on a company-
owned building, which is not paid but is included in cost analysis to reflect the asset’s value.

 Explicit Costs:
These are the actual, out-of-pocket expenses that a firm pays in the course of its
business operations. These include payments for wages, raw materials, rent, utilities, etc.
Explicit costs are easy to observe and calculate because they involve direct payments.

 Implicit Costs:
Implicit costs refer to the opportunity costs of using resources that the firm already
owns, such as the owner’s time or capital. These are costs that are not directly paid out but
represent the value of resources in their next best alternative use. Implicit costs are harder to
measure because they don’t involve direct monetary payments.
Examples: The foregone salary of a business owner who works in his or her own firm.
The opportunity cost of using the owner’s capital in the business instead of investing
it elsewhere.
 Total Cost (TC)
Total cost is the sum of both fixed costs and variable costs. It represents the total
expenditure incurred by a firm in the production of goods and services at any given level of
output.

Formula: TC = FC + VC

Where: TC = Total Cost, FC = Fixed Costs, VC = Variable Costs

 Average Cost (AC)

Average cost (also known as unit cost) is the total cost divided by the number of units
produced. It reflects the cost per unit of output.

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Formula: AC=TC / Q where: AC = Average Cost, TC = Total Cost, Q = Quantity of
output produced
 Marginal Cost (MC)
Marginal cost is the additional cost incurred by producing one more unit of
output. It helps a firm determine the cost of expanding production by a single unit.

Formula: MC = ΔTC / ΔQ Where: MC = Marginal Cost

ΔTC = Change in Total Cost ΔQ = Change in Quantity of output

 Historical Costs and Replacement Costs:

Historical cost is the original cost that has been originally spent to acquire the asset. of
an asset. Historical valuation is the basis for financial accounts.
A replacement cost is the price that is to be paid currently to replace the same asset. A
replacement cost is a relevant cost concept when financial statements have to be adjusted for
inflation.

 Short – Run Costs and Long – Run Costs:

Short-run is a period during which the physical capacity of the firm remains fixed.
Any increase in output during this period is possible only by using the existing physical
capacity more extensively. So Short Run Cost is that which varies with output when the
plant and capital equipment are constant.

Long run is defined as a period of adequate length during which a company may alter
all factors of production with high degree of flexibility. Long Run Cost refers to the total
cost of production when all inputs, including both labour and capital, are variable.

 Joint Costs and Separable Costs:

These are the terms commonly used in cost accounting, especially in industries where
a single production process yields multiple products simultaneously. Joint Costs are the
costs incurred during the production process up to the split-off point—the stage at which
different products become separately identifiable. These costs are common to all joint
products and cannot be directly traced to any one of them. Joint costs typically include
raw materials, labour, and overheads used in the early stages of processing.
For example, in the dairy industry, when milk is processed to produce cream, butter, and
cheese, the cost of processing the milk up to the point where these products separate is a
joint cost.
On the other hand, Separable Costs are the costs incurred after the split-off point, and
they can be directly attributed to each specific product. These costs are unique to each
product and include additional processing, packaging, or marketing costs required to
complete the product for sale.
For example, after crude oil is refined (joint process), the cost of adding specific
additives to produce petrol or diesel would be separable costs.

COST- OUTPUT RELATIONSHIP

The cost-output relationship plays an important role in determining the optimum level of
production. Knowledge of the cost-output relationship helps the manager in cost control,
profit prediction, pricing, promotion etc. Output is an important factor, which influences the
cost. Considering the period, the cost function can be classified as (a) short-run cost
function and (b) long-run cost function.

15
 Short run and Long run Cost Functions.

Short Run Cost Function:

In the short run, at least one factor of production (such as capital or land) is fixed, while
others (like labour or raw materials) can vary. This leads to the classification of costs into
Fixed costs and Variable costs. The short run cost function shows the relationship between
output and total cost when some inputs remain constant. For example, if a factory has a
fixed number of machines, it can only increase output by hiring more labour. Costs such as
rent or equipment depreciation remain unchanged, while wages and raw materials increase
with production.
Example: A bakery with 5 ovens (fixed capital) hires additional bakers to increase daily
bread production. The cost of ovens stays fixed, while labour and flour costs rise with output.

Types of Short Run Costs:

Short run costs include:

o Total Fixed Cost (TFC): Costs that do not change with output (e.g., rent, salaries of
permanent staff).
o Total Variable Cost (TVC): Costs that vary directly with output (e.g., raw materials,
hourly wages).
o Total Cost (TC): Sum of TFC and TVC (TC = TFC + TVC).
o Average Cost (AC), Marginal Cost (MC), etc., are derived to analyse cost efficiency at
different levels of production.

Long Run Cost Function:

In the long run, all factors of production are variable, allowing a firm to adjust its scale of
operations. There are no fixed costs in the long run. The long run cost function shows the
lowest possible cost of producing any given level of output when the firm has full flexibility
to change input combinations. It is derived by choosing the most cost-effective input
combination for each level of output from the short run cost curves.
Example: A garment manufacturer planning to increase output can invest in more advanced
sewing machines and shift to a larger facility, reducing average costs through better
technology and scale.

Types of Long Run Costs:

In the long run, the primary focus is on:

o Long Run Total Cost (LRTC): The minimum cost of producing different output levels
when all inputs are variable.
o Long Run Average Cost (LRAC): LRTC divided by quantity of output, typically
forming a U-shaped curve due to economies and diseconomies of scale.
o Long Run Marginal Cost (LRMC): The change in LRTC due to producing one more
unit of output.

Key Differences Between Short Run and Long Run Cost Functions:

o In the short run, firms are limited by fixed inputs; in the long run, they can adjust all
inputs.
o Short run cost curves include both fixed and variable costs; long run cost curves only
consider variable costs.

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o The short run may not allow cost minimization due to constraints, while the long run
enables optimal resource allocation and scale adjustments.
o Long Run Average Cost (LRAC) acts as the envelope of all possible Short-run Average
Cost (SRAC) curves, representing the lowest achievable average cost for each output
level.

MARKET STRUCTURE
Market is a place where buyer and seller meet, goods, services are offered for the sale, and
transfer of ownership occurs. A market may be also defined as the demand made by a certain
group of potential buyers for a good or service. The former one is a narrow concept and later
one is a broader concept.
Economists describe a market as a collection of buyers and sellers who transact over a
particular product or product class (the housing market, the clothing market, the grain market
etc.). For business purpose, we define a market as people or organizations with wants (needs)
to satisfy, money to spend, and the willingness to spend it.
Broadly, market represents the structure and nature of buyers and sellers for a
commodity/service and the process by which the price of the commodity or service is
established. In this sense, we are referring to the structure of competition and the process of
price determination for a commodity or service. The determination of price for a commodity
or service depends upon the structure of the market for that commodity or service (i.e.,
competitive structure of the market). Hence, the understanding on the market structure and
the nature of competition are a pre-requisite in price determination.

Different Market Structures

Market structure describes the competitive environment in the market for any good or
service. A market consists of all firms and individuals who are willing and able to buy or sell
a particular product. This includes firms and individuals currently engaged in buying and
selling a particular product, as well as potential entrants.

The competitive structure of the market affects the determination of the Price of different
goods and services in the market. This is because the firm operates in a market and not in
isolation. In making decisions concerning economic variables, it is affected, as are all
institutions in society by its environment.

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 Perfect Competition

Perfect competition refers to a market structure where competition among the sellers and
buyers prevails in its most perfect form. In a perfectly competitive market, a single market
price prevails for the commodity, which is determined by the forces of total demand and total
Supply in the market.
Characteristics of Perfect Competition
The following features characterize a perfectly competitive market:
1. A large number of buyers and sellers: The number of buyers and sellers is large and the
share of each one of them in the market is so small that none has any influence on the market
price.
2. Homogeneous product: The product of each seller is totally undifferentiated from those
of the others.
3. Free entry and exit: Any buyer and seller is free to enter or leave the market of the
commodity.
4. Perfect knowledge: All buyers and sellers have perfect knowledge about the market for
the commodity.
5. Indifference: No buyer has a preference to buy from a particular seller and no seller to sell
to a particular buyer.
6. Non-existence of transport costs: Perfectly competitive market also assumes the non-
existence of transport costs.
7. Perfect mobility of factors of production: Factors of production are in a position to move
freely into or out of industry and from one firm to the other.

Price Determination in Perfect Competition

Price is determined by the market forces, that is, demand and supply for a given product or
service. As such, firms have no control over the prices they charge for their products. The
ultimate price is that at which the quantity demanded is equal to the quantity supplied. This
price is also called equilibrium price, as it balances the forces of demand and supply. The
figure shows how the price is determines. DD is the demand curve and SS is the supply curve
₹ 6 is the price at which DD and SS intersect each other. At ₹ 6, 60 units are supplied and
demanded.
If the price increases to ₹8, supply will also increase and hence the price is likely to fall
down. If the price decreases to ₹4, supply will decrease and hence the price is likely to go up.

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One of the objectives of firm and industry is to maximize profit. As an alternative, the firm also
wants to minimize loss. Whatever it may be, a firm must determine the price and quantity that
will ensure achieving these goals. The manner in which a firm/industry determines the price and
output depends on the market form in which it is operating.
In the perfectly competitive market, supply and demand forces determine the price.
Marshal who propounded the theory says that the price is determined by the equilibrium between
demand and supply. The pricing of commodity under perfect competition can be determined in
three periods.
1. Very short period (Market Period)
Market period is too short period to increase the supply. The market period is so short that supply
of the commodity is limited to existing stock. During the market period, say a single day, the
supply of a commodity is perfectly inelastic.
2. Short Period
Short period is not too long period to install new capital equipment. It is also not sufficient period
to permit the new firms to enter the industry to increase the supply of the commodity in the
market. Hence the firm can increase the supply of a commodity in the short period only by
making intensive use of the given plants and equipment and increasing the units of variable
factors. Because of this, the short period supply of a commodity will be relatively less elastic.
3. Long Period
In Long run, the Firm has output (supply) can be changed by both the variable factors and fixed
factors i.e. all factors become variable. There is enough time for new Firms to enter the Industry.
Further, if the demand is increased, the supply can be increased or decreased according to the
demand. For Long run equilibrium, Long run Marginal Cost (LMC) is equal to MR and LMC
curve cut the MR curve from below. In case of long run equilibrium, all the firms will earn only
normal profits.

MONOPOLY
‘Mono’ means single and ‘Poly’ means seller. The term monopoly refers to that market in
which a single firm controls the whole supply of a particular product that has no close
substitutes. Monopoly emerges in firms such as transport, water and electricity supply etc.

Monopoly refers to a market situation where there is only one seller. He has complete control
over the supply of a commodity. He is therefore in a position to fix any price. Under monopoly,
there is no distinction between a firm and an industry. This is because the entire industry consists
of a single firm.

Being the sole producer, the monopolist has complete control over the supply of the commodity.
He has also the power to influence the market price. He can raise the price by reducing his output
and lower the price by increasing his output. Thus, he is a price-maker. He can fix the price to his
maximum advantages.
Features:
1. Single person or a firm: A single person or a firm controls the total supply of the
commodity. There will be no competition for monopoly firm. The monopolist firm is the only
firm in the whole industry.
2. No close substitute: The goods sold by the monopolist shall not have close substitutes.
Even if price of monopoly product increases, people will not go in far substitute. For
example: If the price of electric bulb increases slightly, consumer will not go in for kerosene
lamp.
3. Large number of Buyers: Under monopoly, there may be a large number of buyers. In
the market they compete among themselves.

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4. Price Maker: Since the monopolist controls the whole supply of a commodity, he is a
price-maker; as such, he can alter the price whenever he wants.
5. Supply and Price: The monopolist can fix either the supply or the price. He cannot fix
both. If he charges a very high price, he can sell a small amount. If he wants to sell more, he
has to charge a low price. He cannot sell as much as he wishes for any price he pleases.
6. Downward Sloping Demand Curve: When plotted on a graph paper, the demand curve
(average revenue curve) of monopolist slopes downward from left to right. It means that he
can sell more only by lowering price.
Price-Output Determination under Monopoly
The monopolistic firm attains equilibrium when its marginal cost becomes equal to the
marginal revenue. The monopolist always desires to make maximum profits. He makes
maximum profits when MC=MR. He does not increasing his output if his revenue exceeds
his costs. However, when the costs exceed the revenue, the monopolist firm incur loses.
Hence, the monopolist curtails his production. He produces up to that point where marginal
cost is equal to the marginal revenue (MR=MC). Thus, the point is called equilibrium point.

MONOPOLISTIC COMPETITION
Monopolistic competition is a type of market structure where many companies are present in an
industry, and they produce similar but differentiated products. None of the companies enjoy a
monopoly, and each company operates independently without regard to the actions of other
companies. The market structure is a form of imperfect competition. The characteristics of
monopolistic competition include the following:
1. The presence of many companies
2. Each company produces similar but differentiated products
3. Companies are not price takers
4. Free entry and exit in the industry
5. Companies compete based on product quality, price, and how the product is marketed

Companies in a monopolistic competition make economic profits in the short run, but in the long run,
they make zero economic profit. The latter is also a result of the freedom of entry and exit in the
industry. Economic profits that exist in the short run attract new entries, which eventually lead to
increased competition, lower prices, and high output.
Such a scenario inevitably eliminates economic profit and gradually leads to economic losses
in the short run. The freedom to exit due to continued economic losses leads to an increase in prices
and profits, which eliminates economic losses.
In addition, companies in a monopolistic market structure are productively and allocatively
inefficient as they operate with existing excess capacity. Because of the large number of companies,
each player keeps a small market share and is unable to influence the product price. Therefore,
collusion between companies is impossible.

In addition, monopolistic competition thrives on innovation and variety. Companies must

continuously invest in product development and advertising and increase the variety of their
products to appeal to their target markets. Competition with other companies is thus based on
quality, price, and marketing.
Quality entails product design and service. Companies able to increase the quality of their
products are, therefore, able to charge a higher price and vice versa. Marketing refers to
different types of advertising and packaging that can be used on the product to increase
awareness and appeal.

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Price – Output Determination under Monopolistic Competition
Under monopolistic competition, different firms produce different varieties of products.
Different prices for them will be determined in the market depending upon the demand and
cost conditions. Each firm will set the price and output of its own product. Here also the
profit will be maximized when marginal revenue is equal to marginal cost MR=MC. The
demand curve for the firm in case of monopolistic competition is just similar to that of
monopoly.
The degree of elasticity of demand of a firm in monopolistic competition depends upon the
extent to which the firm can resorts to product differentiation. The greater the ability of the
firm to differentiate the product, the less elastic the demand is. The firm’s influence to
increase the price depends upon the extent to which it can differentiate the product.

OLIGOPOLY
The term oligopoly is derived from two Greek words, oligos meaning a few, and pollen
meaning to sell. Oligopoly is the form of imperfect competition where there are a few sellers
in the market, either producing a homogeneous product or producing products, which are
close but not perfect substitute of each other.
Features
1. Monopoly Power:
There is a clement of monopoly power in oligopoly. Since there are only a few firms and
each firm has a large share of the market. In its share of the market, it controls the price and
output. Thus, oligopoly has some monopoly power.
2. Interdependence of Firms:
Under oligopoly, there are only a few firms, each producing a homogeneous or slightly
differentiated product. Since the number of firms is small, each firm enjoys a large share of
the market and has a significant influence on the price and output decisions. Thus, there is
interdependence of firms. No firm can ignore the actions and reactions of rival firms under
oligopoly.
3. Conflicting Attitude of Firms:
Under oligopoly, two types of conflicting attitudes are found in the firms. On the one hand,
firms realize the disadvantages of mutual competition and desire to combine to maximize
their joint profits. This tendency leads to the formation of collusion. On the other hand, the
desire to maximize one’s individual profit may lead to conflict and antagonism; the firms
come into clash with one another on the question of distribution of profits and allocation of
markets. Thus, there is an existence of two opposing attitudes among the firms.
4. Few firms. In this market, only few sellers are found:
For example, the market for automobiles in India exhibits oligopolistic structure, as there are
only few producers of automobiles. If there are only two firms, it is called ‘duopoly’.
5. Nature of product:
If the firms product homogeneous product, it becomes pure oligopoly. The firms with product
differentiation constitute impure oligopoly.
6. Interdependence among firms:
In oligopoly market, each firm treats the other as its rival firm. It is for this reason that each
firm while determining price of its product, takes into account the reaction of the other firms
to its own action.
7. Large number of consumers:
In this market, there are large numbers of consumers to demand the product.

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 TYPES OF PRICING
Firms set prices for their products through several alternative means. The important pricing
methods followed in practice are shown in the chart.

A. Cost Based Pricing

1. Full cost pricing:-Under this method, price is just equal to the average cost.
2. Cost plus pricing:- Here, the average cost is ascertained and then a conventional margin
added to the cost to arrive at the price. In other words, find out the product unit’s total cost
and add a percentage of profit to arrive at the selling price. It is commonly followed in
departmental stores and other retail shops. This method is simple to be administered. It may
be very difficult to find the selling price in advance due to complexity of the nature of the
project.
3. Marginal cost pricing or Break even pricing or Target profit pricing:- In this method,
selling price is fixed in such a way that it covers full variable or marginal cost and contributes
towards recovery of fixed costs. In the stiff competition, marginal cost offers a guidelines as
to how far the selling price can be lowered.
B. Competition based pricing
Here the price of product is set based on what the competitor charges for a similar product. In
other words, a reduction in the price of products by the competitor will force us to follow
suit. In such a case, the question is how far we can go on reducing the price. Here the
marginal cost concept comes handy. As long as the price covers the marginal cost, continue
to sell. If not, better stop selling. It is because, every unit sold at less than marginal cost
results in loss.
1. Sealed bid pricing:- This method is more popular in tenders and contracts. Each
contracting firm quotes its price in a sealed cover called “tender”. All the tenders are opened
on a scheduled date and the person who quotes the lowest price is awarded the contract.
2. Going rate pricing:- Here the prevailing market price is charged. Suppose, when one
wants to buy or sell gold, the prevailing market rate at a given point of time is taken as the
basis to determine the price.
C. Demand Based Pricing
1. Perceived value pricing:- This method considers the buyer’s perception of the value of
the product as the basis of pricing. Here the pricing rule is that the firm must develop
procedures for measuring the relative value of the product as perceived by consumers.
2. Price discrimination Differential pricing :- Price discrimination refers to the practice
of charging different prices to customers for the same good. In involves selling a product or
service for different prices in different market segments. Price differentiation depends on

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geographical location of the consumers, type of consumer, purchasing quantity, season, time
of the service etc. E.g. Telephone charges, TGSRTC charges.

D. Strategy based pricing

1. Skimming pricing:- The company follows this method when the product is for the first
time introduced in the market. Under this method, the company fixes a very high price for the
product. this strategy is mostly found in case of technology products. When Samsung
introduces a new cell phone model, it fixes a high price because of the uniqueness of the
product.
2. Penetration pricing:- This is exactly opposite to the market skimming method. Here, a
low price is fixed for the product in order to catch the attention of consumers, once the
product image and credibility is established, the seller slowly starts jacking up the price to
reap good profits in future. The ‘Rin’ washing soap perhaps falls into this category. This soap
was sold at a rather low price in the beginning and the firm even distributed free samples.
Today, it is quite an expensive brand and yet it is selling very well.
3. Two-part pricing:- Under this strategy, a firm charges a fixed fee for the right to purchase
its goods, plus a per unit charge for each unit purchased. Entertainment houses such as
country clubs, athletic clubs, etc, usually adopt this strategy. They charge a fixed initiation
fee or membership fee plus a charge, per month or per visit, to use the facilities.
4. Block pricing:- We see block pricing in our day-to-day life very frequently. Four Santhoor
soaps in a single pack with nice looking soap box or five Maggi packets in a single pack with
an attractive bowl indicate this pricing method. The total value of the goods includes
consumers surplus as the consumer is given soap box and bowl along with the products
freely. By selling certain number of units of a product as one package, the firm earns more
than by selling unit wise.
5. Commodity bundling:- Commodity bundling means the practice of bundling two or more
different products together and selling them at single „bundle price‟. For example, tourist
companies offer the package that includes the travelling charges, hotel, meals and sight-
seeing etc, at a bundle price instead of pricing each of these services separately.
6. Peak load pricing:- Under this method, high price is charged during the peak times than
off-peak times. RTC increases charges during festivals; Railways charge more fares during
‘tatkaal’ time. During seasonal period when demand is likely to be higher, a firm may
increase profits by peak load pricing.
7. Cross subsidization:- The process of charging high price for one group of customers in
order to subsidize another group.
8. Transfer pricing:- Transfer pricing means a price at which one process forwards their
output work-in- progress to the next process for further processing. It is an internal pricing
technique.

PRODUCT LIFE CYCLE BASED PRICING

Companies must adapt to the stages of the product life cycle to effectively sell and promote
their products. Depending on the product life cycle stage, a company will develop branding
techniques and an appropriate pricing model. Understanding each stage helps businesses
increase profits.
The stages of a product life cycle govern how a product is priced, distributed, and promoted.
A new product goes through multiple stages during the course of its life cycle, including an
introduction stage, growth stage, maturity stage and a decline stage. As a product ages,

23
companies look for new ways to brand it, and also explore pricing changes. Market and
competitor research help businesses assess the proper course of action to maintain product
profitability.

1. Introduction Stage
A new product may simply be either another brand name added to the existing ones or an
altogether new product. Pricing a new brand for which there are many substitutes available in
market is not a big problem as pricing a new product for which close substitutes are not
available.
There are two type of pricing strategies for new product.
Skimming price policy:- Selling a product at a high price, sacrificing high sales to gain a high
profit, therefore ‘skimming’ the market. Usually employed to reimburse the cost of
investment of the original research into the product - commonly used in electronic markets
when a new range of products is firstly dispatched into the market at a high price.
Penetration price policy:- This pricing policy is adopted generally in the case of new product
for which substitutes are available. This policy requires fixing a lower initial price designed
to penetrate the market as quickly as possible.
2. Growth Stage
During the growth stage, a company aims to develop brand recognition and increase their
customer base. The quality of their product is often improved based on early reviews, and
technical support is usually enhanced. Pricing remains generally stable as demand continues with
minimal competition. A larger distribution network is formed to keep up with the pace of
demand.
3. Maturity Stage
In the maturity stage, the steady sales start to decline and companies face greater challenges
in the marketplace. Competitors will often introduce rival products with the intent of
grabbing some of the market share. This is the product life cycle stage in which the customer
base is heavily fought over and price decreases most often occur. Additional features are
added to distinguish a product from its competitors. Companies run promotions during this
stage that highlight the primary differences between their product and their competitor’s
products.
4. Decline Stage
In the decline stage, a company will make important decisions regarding the future of their
product. They can choose to create new iterations of the product with new features, or they
can reduce the price and offer it at a discount. A company may choose to discontinue the
product altogether, either disposing of their inventory or selling it to another company who is
willing to manufacture and market it. Promotion at this stage will depend on whether a
company chooses to continue its product, and how they plan to re-market it.

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 BREAK EVEN ANALYSIS
BEP analysis is also called as CVP analysis. The BEP can be defined as that level of sales at
which total revenues equals total costs and the net income is equal to zero. This is also known
as no-profit no-loss point.
Break-even analysis refers to analysis of costs and their possible impact on revenues and
volume of the firm. Hence, it is also called the cost-volume-profit (CVP) analysis. A firm is
said to attain the BEP when its total revenue is equal to total cost(TR=TC).
The main objective of the Break Even Analysis is not only to spot the BEP but also to
develop an understanding of the relationships of cost, volume and price within a company’s
practical range of operations.
Assumptions of Break-Even Analysis
1. All cost are divided into fixed and variable
2. Fixed costs remain constant whereas variable costs vary
3. Selling price remains constant
4. There will be no change in the operating efficiency
Key terms used in Break-even Analysis
1. Fixed Cost (FC):- Fixed cost remains fixed in the short-run. These costs must be borne by
the firm ever there is no production. Example: Rent, Insurance, Depreciation, permanent
employees‟ salaries. Etc. Fixed cost per units varies.
2. Variable Costs (VC):- The costs that vary in direct proportion to the production/sales
volume are called as variable costs. Variable cost per unit is fixed. Examples for variable
costs: cost of direct material, cost direct labor, direct expenses, operating supplies such as oil,
grease etc.
3. Total Cost (TC):- The total of fixed cost and variable costs. TC=FC+VC
4. Total Revenue:- The sales amount of goods sold in the market. TR = (Selling Price per
unit x No of units sold).
5. Contribution:- The excess of sales revenue over variable cost (C = S-V).
6. P/V Ratio (Profit/Volume Ratio):- The ratio between the contribution and sales:

7. Margin of Safety Sales (M/S sales):- The excess of actual total sales over break even
sales.

8. Break-Even Point BEP :- The point where total revenue is just equal to the total cost
is called Break-even point. At break-even point, there is not profit or no loss to the business.
Break-even point can be calculated in ‘units’ as well as in ‘sales value’.
SIGNIFICANCE OF BREAK-EVEN ANALYSIS
1. To ascertain the profit on a particular level of sales volume or a given capacity of
production.
2. To calculate sales required to earn a particular desired level of profit.
3. To compare the product lines, sales area, method of sale for individual company.
4. To compare the efficiency of the different firms.

25
5. To decide whether to add a particular product to the existing product line or drop one from
it.
6. To decide to ‘make or buy’ a given component or spare part.
7. To decide what promotion mix will yield optimum sales

LIMITATIONS OF BREAK-EVEN ANALYSIS

1. Break-even point is based on fixed cost, variable cost and total revenue. A change in one
variable is going to affect the BEP.
2. All costs cannot be classified into fixed and variable costs. we have semi-variable costs
also.
3. In case of multi-product firm, a single chart cannot be of any use.
4. It is based on fixed cost concept and hence-holds good only in the short-run.
5. Total cost and total revenue lines are not always straight as shown in the figure. The
quantity and price discounts are the usual phenomena affecting the total revenue line.
6. Where the business conditions are volatile, BEP cannot give stable results.

NUMERICAL PROBLEMS ON BEP

1. A firm has a fixed cost of ₹10,000; Selling Price per unit is Rs.5 and Variable Cost per unit
is ₹3.
a) Determine break-even point in terms of volume (Units) and also sales value.
b) Calculate the margin of safety considering that the actual production is 8000 units.

2. A high-tech rail can carry a maximum of 36,000 passengers per annum at a fare of ₹400
each. The variable cost per passenger is ₹150 while the fixed costs are ₹25,00,000 per year.
Find the break-even point in terms of number of passengers and also in terms of fare
collections.

3. Srikanth Enterprises deals in the supply of hardware parts of computer. The following cost
data is available for two successive periods.
Year I ₹ Year II ₹
Sales 50,000 1,20,000
Fixed costs 10,000 20,000
Variable cost 30,000 60,000

Determine 1. Break Even Point 2. Margin of Safety

4. From the following data, calculate,

a. P/V Ratio, b. Profit when sales are Rs. 20,000 Fixed expenses Rs. 4,000, Break-even point Rs.
10,000

5. A company shows the trading results for two periods:

Period Sales Profit
Period I ₹20,000 ₹1000
Period II ₹10,000 ₹ 400
Calculate P/V Ratio.

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