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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