Introduction about the company :

For nearly 5 years experience in the textile business, Rolex Manufacturing Pvt Ltd Was established in Mumbai, India in 2004. Initially with 80 staffs and 10 sewing machines, our products were Mens Shirt & Womens Shirts ( both casual and formal ), Polo shirt, and kids wear to domestic market in Mumbai. In 2003, we began involving export shirt business under contracts with international trading company in Bangkok in the production of brand shirts in US and Middle-East area. The clothes mainly made by medium-size manufactures located in Mumbai which is a city in India. Our production today has more than 100 management staffs in different divisions. With a large team of experienced and capable workers, we produce more than 100,000 dozens of international quality shirts monthly. We specialize in PoloShirts, Shirts for men and women ( both casual and formal ). Our products have been exported to such countries and regions as United Stated, Africa, and Middle East area. Owing to our strict quality control, we have earned very good reputation from overseas customers. We are improving the manufacturing techniques and exploring market opportunities substantially. As the business has grown and the increasing interest in our quality product, in 2005, the company plans to build a large-size manufacture in Mumbai to expand the capacity of our production and to cut our direct production cost.

Staff & Labour , Production Staff ( per monnth ) Sr No 1 2 3 4 5 6 7 8 9 10 Personnel Marketing Manager Sales Representative Account Officer Clerk / Store Keeper Electrician Peon Production Manager Cutting Master Skilled Workers Unskilled Workers No 1 1 1 2 1 1 1 1 55 15 Rate (Rs) 10000 9000 8000 5000 4500 4000 10000 7000 4000 3500 Amt ( RS ) 10000 9000 8000 5000 4500 4000 10000 7000 220000 52500

History of Shirts :
The world's oldest preserved shirt, discovered by Flinders Petrie, is a "highly sophisticated" linen shirt from a First Dynasty Egyptian tomb at Tarkan, ca. 3000B.C. : "the shoulders and sleeves have been finely pleated to give form-fitting trimness while allowing the wearer room to move. The small fringe formed during weaving along one edge of the cloth has been placed by the designer to decorate the neck opening and side seam." The article of clothing often symbolizing elegance and refinement but also an expression of liberty, the shirt for centuries has accompanied and characterized the life of men. Worn by emperors, generals Until the time of the Italian Republic (1860s), as can be deduced from Latin sources, known by the term "subucula" the shirt had the function of modern undershirts. His historians report that Charles the Great "...wore directly on his person a shirt and pants of linen cotton." Men and women in the city and the country dressed in the same manner: shirt and long tunic with sleeves of different dimensions. The popularity of the shirt continuously increased and it became a gift object for both the privileged and the needy. Beginning in the 1300s also art and literature give prominence to this top shirt: in the canvases of many painters among which is Caravaggio, or in the literary works such as Boccaccio's Decameron, where often men and women wore shirts. We suppose therefore that its wide adoption was above all Many cities became famous for their shirt production, such as Venice, where for the wedding of noblewoman Lucieta Gradenigo a "shirt of gold" was created. In the 1500s the true protagonist was the collar: from the small flat collars called French to the Italian version that took the form and name of "frill", to the "giorgiera" that required an enormous expanse of fabric up to 11 meters (36 ft.). In 1843 at Montevideo in Italy the famous red shirt of the shirt, its success constantly growing, began to alter its style according to the occasion: without a collar and with wide sleeves for the painter, white and at times without a right

sleeve for the sword duel, or well hidden under the jacket for pistols. In the 20th century it was above all the American cinema that popularized different types of shirts. Pure white shirts with flowing sleeves worn by Rudolph Valentino, the "Oxford" of Humphrey Bogart, the type suited for the hard life of the far west worn on screen by John Wayne, or to finish, the mythic Hawaiian worn by Tom Sellek in the cult series "Magnum P.I." of the 1980s. Of the many types of shirts, how can one forget the "button down", in particular for the varying accounts of its true origin and authorship. The most memorable suggests that the founder of this most famous American shirt industry, the cult following of this leader of shirts, was inspired in England at a polo match where the players had their collars attached to keep them from flapping in the wind. The more credited version however is another in which its anonymous inventor found himself on a pier in the New York harbor during a particularly windy day and, annoyed by his collar blowing in the wind, attached it at the ends with buttons made of mother of pearl. Whichever is its true genesis, the "button down" is found in formal settings, with the collar open, in moments of relaxation, and dressed up with a tie or bowtie for important occasions, demonstrating that it is the most versatile leader of the many models of shirts. With this brief voyage through the history of the shirt we can see that from its first appearance in ancient times to today man has never stopped producing it in new shapes and fashions, wearing it in different ways and loving it with an immutable passion, The shirt was an item of men's underwear until the twentieth century. Although the woman's chemise was a closely related shirt to the man's, it is the man's shirt that became the modern shirt. In the Middle Ages it was a plain, undyed shirt worn next to the skin and under regular shirts. In medieval artworks, the shirt is only visible (uncovered) on humble characters, such as shepherds, prisoners, and penitents. In the seventeenth century men's shirts were allowed to show, with much the same erotic import as visible underwear today. In the eighteenth century, instead of underpants, men "relied on the long tails of shirts ... to

serve the function of drawers. Eighteenth century costume historian Joseph Strutt believed that men who did not wear shirts to bed were indecent. Even as late as 1879, a visible shirt with nothing over it was considered improper. The shirt sometimes had frills at the neck or cuffs. In the sixteenth century, men's shirts often had embroidery, and sometimes frills or lace at the neck and cuffs, and through the eighteenth century long neck frills, or jabots, were fashionable. Colored shirts began to appear in the early nineteenth century, as can be seen in the paintings of George Caleb Bingham. They were considered casual wear, for lower class workers only, until the twentieth century. For a gentleman, "to wear a sky-blue shirt was unthinkable in 1860 but had become standard by 1920 and, in 1980, constituted the most commonplace event."European and American women began wearing shirts in 1860, when the Garibaldi shirt, a red shirt as worn by the freedom fighters under Giuseppe Garibaldi, was popularized by Empress Eugnie of France. At the end of the 19th century, the Century Dictionary described an ordinary shirt as "of cotton, with linen bosom, wristbands and cuffs prepared for stiffening with starch, the collar and wristbands being usually separate and adjustable". The word shirts is used in the UK and Ireland, but some other English-speaking countries such as Canada, South Africa, and the United States often refer to such items of clothing as pants, a shortening of the historic term pantaloons. Australia is known to differentiate between pants and shirts. Additional synonyms include slacks, strides, kegs , breeches or breeks. Shorts are similar to shirts, but with legs that come down only to around the area of the knee, higher or lower than the knee depending on the style of the shirt. In most of the Western world, shirts have been worn since ancient times and throughout the Medieval period, becoming the most common form of lower body clothing for males in the modern period, although shorts are also widely worn, and kilts and other shirts may be worn in various regions and cultures. Since the 20th century, shirts have become prevalent for females as well. Shorts are often preferred in hot weather or for some sports, and also often

by children. Shirts are worn at the hips or waist, and may be held up by their own fastenings, a belt, or suspenders (braces). Leggings are form-fitting shirts of a clingy material, often knitted cotton and spandex. There are different types of shirts such as : Formal Shirts for men and women

Casual Shirts

Different Brands of Shirts :

Raymond :
For over 80 years, Raymond is counted as one of the world's premier manufacturers of worsted suiting fabric in fine grade wool, in the same league as the finest that Europe has to offer. Today, the Raymond product range includes pure wools, wool blended with exotic fibres like camel hair, cashmere and angora and innovative blends of wool with polyester, linen and silk. Offering suiting and rousering fabric for all occasions and needs. Our

domestic distribution is spread far and wide with more than 30,000 outlets that stock and sell our wide range of fabrics. Fine products, wide range, superb distribution and intelligent advertising support have helped the company gain a dominant share of the market. No wonder, premium labels from the world's fashion capitals prefer Raymond.

Raymond is the world's largest producer of worsted suiting fabrics commanding over 60% market share in India. With a capacity of 31 million meters, we are among the few companies in the world, fully integrated to manufacture worsted fabrics, wool & wool blended fabrics. We also convert these fabrics into suits, trousers and apparels that are exported to over 55 countries in the world; including European Union, USA, Canada, Japan and Australia amongst others. A trendsetter and an innovator in the Indian textile market, our expertise has been brought forth by our in-house research & development team. Their innovations have become milestones in the worsted suitings industry. We mastered the craft of producing the finest suiting in the world using super fine wool count (from 80s to 240s) and blending the same with superfine polyester and other specialty fibres, like Cashmere, Angora, Alpaca, Pure
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wool and Linen. Raymond has created the worlds finest worsted suiting fabric from the finest wool ever produced in the world the Super 240s fabric made of 11.6 micron wool. Today we are recognized as a pioneer in manufacturing worsted suitings in India, producing nearly 20,000 designs and colours of suiting fabrics, which are retailed through over 3,000 stores in over 400 towns across India. From fabric to fine tailored clothing, Silver Spark Apparel Ltd. marks the Group's foray into the global apparel market.

World-class facilities

Raymond's manufacturing facilities include three world-class fully integrated plants in India, deploying state-of-the-art technology modern quality management systems like ISO 9001 and Environment Control Systems (ISO 14001). All our plants are self-sufficient and provide staff welfare measures such as education, housing, recreation and support systems for employee. Raymond plants are located in India at the following locations: Chhindwara in Central India, Vapi in Gujarat, near Mumbai and Jalgaon in Maharashtra.

Colour Plus :

Launched in 1993, Color Plus created a niche in the ready to wear market in India with a premium range of clothing for men. With focus on product innovation and unique use of colors it has today come a long way since inception. The brand in no time has become the choice of the up market, trend-savvy, sophisticated and discerning Indian man and changed the way he dressed. With flagship stores in the best locations and international service, Color Plus brought in an international shopping experience to the country. Our distribution channel spread not only all over the country but crossed borders to the Middle East; it continues to grow with each year with now over 350 shopping destinations across the country. Color Plus has always used highest quality fabrics and product engineering techniques that give the user the unique comfort and tactile feel which no other brand offers. This is clubbed with the use of colors to give the sophisticate, yet colorful look that is unique to the Brand. To ensure that customers get the best product from us, we have pioneered the techniques like Golf Ball Wash, Come Dyed Casuals and Thermo-fused buttoning to name a few. These innovations have taken our collection to a whole new level, making it synonymous with the words Luxury & Style. All our products are complemented by a matching range of accessories like genuine leather hand bags, hand braided belts, shoes & scarves. Color Plus today is a complete lifestyle brand complementing every facet of your personality: be it at work, leisure or those special moments.

Marginal Costing - Introduction

Like process costing or job costing, marginal costing is not a distinct method of ascertainment of cost but is a technique which applies existing methods in a particular manner so that the relationship between profit & the volume of output can be clearly brought out. Marginal costing ascertains marginal or variable costs & the effect on profit, of the changes in volume or type of output, by differentiating between variable costs & fixed costs. To any type of costing such as historical, standard, process or job; the marginal costing technique may be applie Under the process of marginal costing, from the cost components, fixed costs are excluded. The difference which arises between the variable costs incurred for activities & the revenue earned from those activities is defined as the gross margin or contribution. It may relate to total sales or may relate to one unit.

For the business as a whole, contributions earned by specific products or group of products, are added so as to calculate the pool of total contribution. The fixed costs of the business are paid from this pool & then the part of the total contribution which remains becomes the profit of the business as a whole.

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Marginal cost

A typical marginal cost curve with marginal revenue overlaid In economics and finance, marginal cost is the change in the total cost that arises when the quantity produced changes by one unit. That is, it is the cost of producing one more unit of a good In general terms, marginal cost at each level of production includes any additional costs required to produce the next unit. For example, if producing additional vehicles requires building a new factory, the marginal cost of the extra vehicles includes the cost of the new factory. In practice, this analysis is segregated into short and long-run cases, so that over the longest run, all costs become marginal. At each level of production and time period being considered, marginal costs include all costs that vary with the level of production, whereas other costs that do not vary with production are considered fixed. If the good being produced is infinitely divisible, so the size of a marginal cost will change with volume, as a non-linear and non-proportional cost function includes the following:

variable terms dependent to volume,

constant terms independent to volume and occurring with the respective lot size, jump fix cost increase or decrease dependent to steps of volume increase.

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In practice the above definition of marginal cost as the change in total cost as a result of an increase in output of one unit is inconsistent with the differential definition of marginal cost for virtually all non-linear functions. This is as the definition finds the tangent to the total cost curve at the point q which assumes that costs increase at the same rate as they were at q. A new definition may be useful for marginal unit cost (MUC) using the current definition of the change in total cost as a result of an increase of one unit of output defined as: TC(q+1)-TC(q) and re-defining marginal cost to be the change in total as a result of an infinitesimally small increase in q which is consistent with its use in economic literature and can be calculated differentially. If the cost function is differentiable joining, the marginal cost is the cost of the next unit produced referring to the basic volume.

If the cost function is not differentiable, the marginal cost can be expressed as follows.

A number of other factors can affect marginal cost and its applicability to real world problems. Some of these may be considered market failures. These may include information asymmetries, the presence of negative or positive externalities, transaction costs, price discrimination and others.

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Cost functions and relationship to average cost

In the simplest case, the total cost function and its derivative are expressed as follows, where Q represents the production quantity, VC represents variable costs, FC represents fixed costs and TC represents total costs.

Since (by definition) fixed costs do not vary with production quantity, it drops out of the equation when it is differentiated. The important conclusion is that marginal cost is not related to fixed costs. This can be compared with average total cost or ATC, which is the total cost divided by the number of units produced and does include fixed costs.

For discrete calculation without calculus, marginal cost equals the change in total (or variable) cost that comes with each additional unit produced. In contrast, incremental cost is the composition of total cost from the surrogate of contributions, where any increment is determined by the contribution of the cost factors, not necessarily by single units.

For instance, suppose the total cost of making 1 shoe is $30 and the total cost of making 2 shoes is $40. The marginal cost of producing the second shoe is $40 - $30 = $10. Marginal cost is not the cost of producing the "next" or "last" unit. As Silberberg and Suen note, the cost of the last unit is the same as the cost of the first unit and every other unit. In the short run, increasing production requires using more of the variable input conventionally assumed to be labor. Adding more labor to a fixed capital stock reduces the marginal product

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of labor because of the diminishing marginal returns. This reduction in productivity is not limited to the additional labor needed to produce the marginal unit - the productivity of every unit of labor is reduced. Thus the costs of producing the marginal unit of output has two components: the cost associated with producing the marginal unit and the increase in average costs for all units produced due to the damage to the entire productive process (AC/q)q. The first component is the per unit or average cost. The second unit is the small increase in costs due to the law of diminishing marginal returns which increases the costs of all units of sold. Therefore, the precise formula is: MC = AC + (AC/q)q.

Marginal costs can also be expressed as the cost per unit of labor divided by the marginal product of labour. MC = VCq; VC = wL; MC = wL;/q; Lq the change in quantity of labor to affect a one unit change in output = 1MPL. Therefore MC = w/MPL Since the wage rate is assumed constant marginal cost and marginal product of labor have an inverse relationship - if marginal cost is increasing (decreasing) the marginal product of labor is decreasing (increasing)

Decisions taken based on marginal costs

In perfectly competitive markets, firms decide the quantity to be produced based on marginal costs and sale price. If the sale price is higher than the marginal cost, then they supply the unit and sell it. If the marginal cost is higher than the price, it would not be profitable to produce it. So the production will be carried out until the marginal cost is equal to the sale price. In other words, firms refuse to sell if the marginal cost is higher than the market price.
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Relationship to fixed costs

Marginal costs are not affected by changes in fixed cost. Marginal costs can be expressed as C(q)Q. Since fixed costs do not vary with (depend on) changes in quantity, MC is VCQ. Thus if fixed cost were to double MC would not be affected and consequently the profit maximizing quantity and price would not change. This can be illustrated by graphing the short run total cost curve and the short run variable cost curve. The shape of the curves are identical. Each curve initially decreases at a decreasing rate, reaches an inflection point, then increases at a increasing rate. The only difference between the curves is that the SRVC curve begins from the origin while the SRTC curve originates on the y-axis. The distance of the origin of the SRTC above the origin represents the fixed cost - the vertical distance between the curves. This distance remains constant as the quantity produced, Q, increases. MC is the slope of the SRVC curve. A change in fixed cost would be reflected by a change in the vertical distance between the SRTC and SRVC curve. Any such change would have no effect on the shape of the SRVC curve and therefore its slope at any point - MC.

Externalities
Externalities are costs (or benefits) that are not borne by the parties to the economic transaction. A producer may, for example, pollute the environment, and others may bear those costs. A consumer may consume a good which produces benefits for society, such as education; because the individual does not receive all of the benefits, he may consume less than efficiency would suggest. Alternatively, an individual may be a smoker or alcoholic and impose costs on others. In these cases, production or consumption of the good in question may differ from the optimum level.

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] Negative externalities of production

Negative Externalities of Production

Much of the time, private and social costs do not diverge from one another, but at times social costs may be either greater or less than private costs. When marginal social costs of production are greater than that of the private cost function, we see the occurrence of a negative externality of production. Productive processes that result in pollution are a textbook example of production that creates negative externalities.

Such externalities are a result of firms externalising their costs onto a third party in order to reduce their own total cost. As a result of externalising such costs we see that members of society will be negatively affected by such behavior of the firm. In this case, we see that an increased cost of production on society creates a social cost curve that depicts a greater cost than the private cost curve. In an equilibrium state we see that markets creating negative externalities of production will overproduce that good. As a result, the socially optimal production level would be lower than that observed.

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Positive externalities of production

Positive Externalities of Production

When marginal social costs of production are less than that of the private cost function, we see the occurrence of a positive externality of production. Production of public goods are a textbook example of production that create positive externalities. An example of such a public good, which creates a divergence in social and private costs, includes the production of education. It is often seen that education is a positive for any whole society, as well as a positive for those directly involved in the market.

Examining the relevant diagram we see that such production creates a social cost curve that is less than that of the private curve. In an equilibrium state we see that markets creating positive externalities of production will under produce that good. As a result, the socially optimal production level would be greater than that observed.

Average cost
In economics, average cost or unit cost is equal to total cost divided by the number of goods produced (the output quantity, Q). It is also equal to the sum of average variable costs (total variable costs divided by Q) plus average fixed costs (total fixed costs divided by Q).

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Average costs may be dependent on the time period considered (increasing production may be expensive or impossible in the short term, for example). Average costs affect the supply curve and are a fundamental component of supply and demand

Short-run average cost

Average cost is distinct from the price, and depends on the interaction with demand through elasticity of demand and an average cost due to marginal cost pricing.

Short-run average cost will vary in relation to the quantity produced unless fixed costs are zero and variable costs constant. A cost curve can be plotted, with cost on the y-axis and quantity on the x-axis. Marginal costs are often shown on these graphs, with marginal cost representing the cost of the last unit produced at each point; marginal costs are the slope of the cost curve or the first derivative of total or variable costs.

A typical average cost curve will have a U-shape, because fixed costs are all incurred before any production takes place and marginal costs are typically increasing, because of diminishing marginal productivity. In this "typical" case, for low levels of production marginal costs are below average costs, so average costs are decreasing as quantity increases. An increasing marginal cost curve will intersect a U-shaped average cost curve at its minimum, after which point the average cost curve begins to slope upward. For further increases in production beyond this minimum, marginal cost is above average costs, so
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average costs are increasing as quantity increases. An example of this typical case would be a factory designed to produce a specific quantity of widgets per period: below a certain production level, average cost is higher due to under-utilised equipment, while above that level, production bottlenecks increase the average cost.

Long-run average cost

The long run is a time frame in which the firm can vary the quantities used of all inputs, even physical capital. A long-run average cost curve can be upward sloping, downward sloping, or downward sloping at relatively low levels of output and upward sloping at relatively high levels of output, with an in-between level of output at which the slope of long-run average cost is zero. The typical long-run average cost curve is U-shaped, by definition reflecting increasing returns to scale where negatively sloped and decreasing returns to scale where positively sloped.

If the firm is a perfect competitor in all input markets, and thus the per-unit prices of all its inputs are unaffected by how much of the inputs the firm purchases, then it can be shown that at a particular level of output, the firm has economies of scale (i.e., is operating in a downward sloping region of the long-run average cost curve) if and only if it has increasing returns to scale. Likewise, it has diseconomies of scale (is operating in an upward sloping region of the long-run average cost curve) if and only if it has decreasing returns to scale, and has neither economies nor diseconomies of scale if it has constant returns to scale. In this case, with perfect competition in the output market the long-run market equilibrium will involve all firms operating at the minimum point of their long-run average cost curves (i.e., at the borderline between economies and diseconomies of scale).
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If, however, the firm is not a perfect competitor in the input markets, then the above conclusions are modified. For example, if there are increasing returns to scale in some range of output levels, but the firm is so big in one or more input markets that increasing its purchases of an input drives up the input's per-unit cost, then the firm could have diseconomies of scale in that range of output levels. Conversely, if the firm is able to get bulk discounts of an input, then it could have economies of scale in some range of output levels even if it has decreasing returns in production in that output range.

In some industries, the LRAC is always declining (economies of scale exist indefinitely). This means that the largest firm tends to have a cost advantage, and the industry tends naturally to become a monopoly, and hence is called a natural monopoly. Natural monopolies tend to exist in industries with high capital costs in relation to variable costs, such as water supply and electricity supply. Long run average cost is the unit cost of producing a certain output when all inputs are variable. The behavioral assumption is that the firm will choose that combination of inputs that will produce the desired quantity at the lowest possible cost.

Relationship to marginal cost

When average cost is declining as output increases, marginal cost is less than average cost. When average cost is rising, marginal cost is greater than average cost. When average cost is neither rising nor falling (at a minimum or maximum), marginal cost equals average cost.

Other special cases for average cost and marginal cost appear frequently:

Constant marginal cost/high fixed costs: each additional unit of production is produced at constant additional expense per unit. The average cost curve slopes down continuously, approaching marginal cost. An example may be hydroelectric

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generation, which has no fuel expense, limited maintenance expenses and a high up front fixed cost (ignoring irregular maintenance costs or useful lifespan). Industries where fixed marginal costs obtain, such as electrical transmission networks, may meet the conditions for a natural monopoly, because once capacity is built, the marginal cost to the incumbent of serving an additional customer is always lower than the average cost for a potential competitor. The high fixed capital costs are a barrier to entry.

Minimum efficient scale / maximum efficient scale: marginal or average costs may be non-linear, or have discontinuities. Average cost curves may therefore only be shown over a limited scale of production for a given technology. For example, a nuclear plant would be extremely inefficient (very high average cost) for production in small quantities; similarly, its maximum output for any given time period may essentially be fixed, and production above that level may be technically impossible, dangerous or extremely costly. The long run elasticity of supply will be higher, as new plants could be built and brought on-line.

Zero fixed costs (long-run analysis) / constant marginal cost: since there are no economies of scale, average cost will be equal to the constant marginal cost.

Relationship between AC, AFC, AVC and MC

1. The Average Fixed Cost curve (AFC) starts from a height and goes on declining continuously as production increases.

2. The Average Variable Cost curve, Average Cost curve and the Marginal Cost curve start from a height, reach the minimum points, then rise sharply and continuously.

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3. The Average Fixed Cost curve approaches zero asymptotically. The Average Variable Cost curve is never parallel to or as high as the Average Cost curve due to the existence of positive Average Fixed Costs at all levels of production; but the Average Variable Cost curve asymptotically approaches the Average Cost curve from below.

4. The Marginal Cost curve always passes through the minimum points of the Average Variable Cost and Average Cost curves, though the Average Variable Cost curve attains the minimum point prior to that of the Average

Cost curve
In economics, a cost curve is a graph of the costs of production as a function of total quantity produced. In a free market economy, productively efficient firms use these curves to find the optimal point of production (minimizing cost), and profit maximizing firms can use them to decide output quantities to achieve those aims. There are various types of cost curves, all related to each other, including total and average cost curves, and marginal ("for each additional unit") cost curves, which are the equal to the differential of the total cost curves.

Short-run average total cost curve (SRATC or SRAC)

Typical short run average cost curve

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The average total cost curve is constructed to capture the relation between cost per unit of output and the level of output, ceteris paribus. A perfectly competitive and productively efficient firm organizes its factors of production in such a way that the average cost of production is at the lowest point. In the short run, when at least one factor of production is fixed, this occurs at the output level where it has enjoyed all possible average cost gains from increasing production. This is at the minimum point in the diagram on the right.

Short-run total cost is given by

STC = PKK+PLL,

where PK is the unit price of using physical capital per unit time, P L is the unit price of labor per unit time (the wage rate), K is the quantity of physical capital used, and L is the quantity of labor used. From this we obtain short-run average cost, denoted either SATC or SAC, as STC / Q:

SRATC or SRAC = PKK/Q + PLL/Q = PK / APK + PL / APL,

where APK = Q/K is the average product of capital and APL = Q/L is the average product of labor. Short run average cost equals average fixed costs plus average variable costs. Average fixed cost continuously falls as production increases in the short run, because K is fixed in the short run. The shape of the average variable cost curve is directly determined by increasing and then diminishing marginal returns to the variable input.

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Short-run marginal cost curve (SRMC)

Typical marginal cost curve

A short-run marginal cost curve graphically represents the relation between marginal (i.e., incremental) cost incurred by a firm in the short-run production of a good or service and the quantity of output produced. This curve is constructed to capture the relation between marginal cost and the level of output, holding other variables, like technology and resource prices, constant. The marginal cost curve is 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. This shape of the marginal cost curve is directly attributable to increasing, then decreasing marginal returns (and the law of diminishing marginal returns). Marginal cost equals w/MPL. For most production processes the marginal product of labor initially rises, reaches a maximum value and then continuously falls as production increases. Thus marginal cost initially falls, reaches a minimum value and then increases The marginal cost curve intersects both the average variable cost curve and (short-run) average total cost curve at their minimum points. When the marginal cost curve is above an average cost curve the average

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curve is rising. When the marginal costs curve is below an average curve the average curve is falling. This relation holds regardless of whether the marginal curve is rising or falling.

Long-run marginal cost curve (LRMC)

The long-run marginal cost curve shows for each unit of output the added total cost incurred in the long run, that is, the conceptual period when all factors of production are variable so as minimize long-run average total cost. Stated otherwise, LRMC is the minimum increase in total cost associated with an increase of one unit of output when all inputs are variable.

The long-run marginal cost curve is shaped by economies and diseconomies of scale, a longrun concept, rather than the law of diminishing marginal returns, which is a short-run concept. The long-run marginal cost curve tends to be flatter than its short-run counterpart due to increased input flexibility as to cost minimization. The long-run marginal cost curve intersects the long-run average cost curve at the minimum point of the latter When long-run marginal costs are below long-run average costs, long-run average costs are falling (as to additional units of output When long-run marginal costs are above long run average costs, average costs are rising. Long-run marginal cost equals short run marginal-cost at the leastlong-run-average-cost level of production. LRMC is the slope of the LR total-cost function.

Graphing cost curves together

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Cost curves in perfect competition compared to marginal revenue Cost curves can be combined to provide information about firms. In this diagram for example, firms are assumed to be in a perfectly competitive market. In a perfectly competitive market the price that firms are faced with would be the price at which the marginal cost curve cuts the average cost curve.

Cost curves and production functions

Assuming that factor prices are constant, the production function determines all cost functions The variable cost curve is the inverted short-run production function or total product curve and its behavior and properties are determined by the production function Because the production function determines the variable cost function it necessarily determines the shape and properties of marginal cost curve and the average cost curves. If the firm is a perfect competitor in all input markets, and thus the per-unit prices of all its inputs are unaffected by how much of the inputs the firm purchases, then it can be shown that at a particular level of output, the firm has economies of scale (i.e., is operating in a downward sloping region of the long-run average cost curve) if and only if it has increasing returns to scale. Likewise, it has diseconomies of scale (is operating in an upward sloping region of the long-run average cost curve) if and only if it has decreasing returns to scale, and has neither economies nor diseconomies of scale if it has constant returns to scale. In this case, with perfect competition in the output market the long-run market equilibrium will involve all firms operating at the minimum point of their long-run average cost curves (i.e., at the borderline between economies and diseconomies of scale).

If, however, the firm is not a perfect competitor in the input markets, then the above conclusions are modified. For example, if there are increasing returns to scale in some range

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of output levels, but the firm is so big in one or more input markets that increasing its purchases of an input drives up the input's per-unit cost, then the firm could have diseconomies of scale in that range of output levels. Conversely, if the firm is able to get bulk discounts of an input, then it could have economies of scale in some range of output levels even if it has decreasing returns in production in that output range.

Relationship between different curves

Total Cost = Fixed Costs (FC) + Variable Costs (VC) Marginal Cost (MC) = dC/dQ; MC equals the slope of the total cost function and of the variable cost function

Average Total Cost (ATC) = Total Cost/Q Average Fixed Cost (AFC) = FC/Q Average Variable Cost = VC/Q. ATC = AFC + AVC The MC curve is related to the shape of the ATC and AVC curves:[8]:212
o

At a level of Q at which the MC curve is above the average total cost or average variable cost curve, the latter curve is rising.[8]:212

If MC is below average total cost or average variable cost, then the latter curve is falling.

If MC equals average total cost, then average total cost is at its minimum value.

If MC equals average variable cost, then average variable cost is at its minimum value.

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Contribution margin

Decomposing Sales as Contribution plus Variable Costs. In the Cost-Volume-Profit Analysis model, costs are linear in volume.

In cost-volume-profit analysis, a form of management accounting, contribution margin is the marginal profit per unit sale. It is a useful quantity in carrying out various calculations, and can be used as a measure of operating leverage. Typically, high contribution margins are prevalent in the labour-intensive tertiary sector while low contribution margins are prevalent in the capital-intensive industrial sector

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The Break-Even Point'

In economics & business, specifically cost accounting, the break-even point (BEP) is the point at which cost or expenses and revenue are equal: there is no net loss or gain, and one has "broken even". A profit or a loss has not been made, although opportunity costs have been "paid", and capital has received the risk-adjusted, expected return. In short, all costs that needs to be paid are paid by the firm but the profit is equal to 0.

For example, if a business sells fewer than 200 tables each month, it will make a loss, if it sells more, it will be a profit. With this information, the business managers will then need to see if they expect to be able to make and sell 200 tables per month.

If they think they cannot sell that many, to ensure viability they could:

1. Try to reduce the fixed costs (by renegotiating rent for example, or keeping better control of telephone bills or other costs) 2. Try to reduce variable costs (the price it pays for the tables by finding a new supplier) 3. Increase the selling price of their tables.

Any of these would reduce the break even point. In other words, the business would not need to sell so many tables to make sure it could pay its fixed costs. In the linear Cost-VolumeProfit Analysis model, the break-even point (in terms of Unit Sales (X)) can be directly computed in terms of Total Revenue (TR) and Total Costs (TC) as:

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where:

TFC is Total Fixed Costs, P is Unit Sale Price, and V is Unit Variable Cost.

The Break-Even Point can alternatively be computed as the point where Contribution equals Fixed Costs.

The quantity,

, is of interest in its own right, and is called the Unit Contribution

Margin (C): it is the marginal profit per unit, or alternatively the portion of each sale that contributes to Fixed Costs. Thus the break-even point can be more simply computed as the point where Total Contribution = Total Fixed Cost:

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To calculate the break even point in terms of revenue (aka. currency units, aka. sales proceeds) instead of Unit Sales (X), the above calculation can be multiplied by Price, or, equivalently, the Contribution Margin Ratio (Unit Contribution Margin over Price) can be

calculated:

R=C, Where R is revenue generated, C is cost incurred i.e. Fixed costs + Variable Costs or Q * P(Price per unit) = TFC + Q * VC(Price per unit), Q * P - Q * VC = TFC, Q * (P - VC) = TFC, or, Break Even Analysis Q = TFC/c/s ratio=Break Even

Margin of Safety
Margin of safety represents the strength of the business. It enables a business to know what is the exact amount it has gained or lost and whether they are over or below the break even point.

margin of safety = (current output - breakeven output)

margin of safety% = (current output - breakeven output)/current output 100

When dealing with budgets you would instead replace "Current output" with "Budgeted output".

If P/V ratio is given then profit/ PV ratio

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Limitations

Break-even analysis is only a supply side (i.e. costs only) analysis, as it tells you nothing about what sales are actually likely to be for the product at these various prices.

It assumes that fixed costs (FC) are constant. Although this is true in the short run, an increase in the scale of production is likely to cause fixed costs to rise.

It assumes average variable costs are constant per unit of output, at least in the range of likely quantities of sales. (i.e. linearity)

It assumes that the quantity of goods produced is equal to the quantity of goods sold (i.e., there is no change in the quantity of goods held in inventory at the beginning of the period and the quantity of goods held in inventory at the end of the period).

In multi-product companies, it assumes that the relative proportions of each product sold and produced are constant (i.e., the sales mix is constant).

Features of Marginal Costing:

a. Classification of costs into fixed costs & variable costs is done under marginal costing system. Also semi-fixed or semi-variable cots get further classified into fixed & variable elements. b. To the product, only variable elements of cost, which constitute marginal cost, are attached. c. After the marginal cost & marginal contribution are taken into consideration; price is fixed. d. From the total contribution for any period, fixed cost for the period are deducted.
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e. The profitability of a department or product is decided by the marginal contribution. f. At variable production cost, the valuation of work-in-progress & finished product is made.

Advantages of Marginal Costing:

a. As there is involvement of computation of variable costs only in marginal costing, it is easy to understand & operate the same. b. Among different products or departments, arbitrary apportionment of fixed costs is avoided & the under-recovery or over-recovery problems are eliminated. c. Any attempt of measurement of relative profitability of different products or different departments becomes complicated due to the arbitrary apportionment of fixed costs. d. Analysis of contribution, break even charts & analysis of cost-volume-profit-analysis are resulted out of a marginal costing system; for making short term decisions all of these are important. e. More uniform & realistic figures are resulted out of marginal costing system because fixed overhead costs are excluded from valuation of stock & work-in-progress. f. Apportionment of responsibility of control can be more easily done since to each level of management only variable costs are presented over which they have control. g. The effects of their decisions can be more readily seen by all levels of managementsometimes even before taking of an action.

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Disadvantages of Marginal Costing:

a. The process of separating semi-variable or semi-fixed costs into their variable & fixed elements is an arbitrary exercise which at different levels of output may be subject to fluctuations & inaccuracy. Consequently, a substantial degree of error may be contained in the basic cost information which is used in decision making process. b. When selling prices are based on marginal costs, great care need to be exercised, as in the long run, all fixed overheads should be covered by the prices & a reasonable margin over & above the total costs should be left. c. Under many circumstances, the deduction of contribution made by some production units may be difficult. Thereby the effectiveness of the system is lost. d. Since on the basis of variable costs only the valuation of stock of finished goods & work-in-progress is done, they are always understated. As result profit is also understated. e. More effective utilization of present resources or by expansion of resources or by mechanization, increased production & sales may be effected. The disclosure of this fact cannot be done by marginal costing.

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Process of marginal costing:

Under marginal costing, calculation of the difference between sales & marginal cost of sales is done. This difference is known as contribution, which provides for fixed cost & profit. Excess of contribution over the fixed cost is known as net margin or profit. Here on the increasing total contribution emphasis remains.

Variable Cost:
Variable is that part of total cost which in proportion with volume changes directly. With change in volume of output, total variable cost changes. Increase in total variable cost results from increase in output & reduction in total variable cost results from decrease in output. However, irrespective of increase or decrease in volume of production, there will be no change in variable cost per unit of output. Cost of direct material, direct labour, direct expenses etc. are included in variable cost. By dividing total variable cost by units produced, variable cost per unit is arrived at. Variable cost per unit is also referred as variable cost ratio. By dividing change in cost by change in activity, variable cost can be arrived at.

Variable costs are very sensitive in nature & variety of factors can influence the same. Helping management in controlling variable cost is the main aim of marginal costing because this is the area of cost which itself needs control by management.

Fixed Cost:
Cost which is incurred for a period & which tends to remain unaffected by fluctuations in the level of activity, output or turnover, within certain output & turnover limits. Examples are rent, rates, salaries of executive & insurance etc.

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Contribution:
On the idea of contribution, analysis of marginal costing depends a lot. In this technique, for increasing total contribution only, efforts are directed. Contribution is a term which defines the surplus that remains after variable cost of sales is deducted from sales revenue as indicated below: Contribution = Sales revenue Variable cost of sales

A product whose selling price exceeds its variable cost is said to have: Alternatively, contribution is equivalent to fixed cost plus profit. Thus, this relationship may be expressed as under: Sales Variable cost = Contribution

Fixed cost + Profit = Contribution

Thereby, Sales Variable cost = Fixed cost + Profit

It becomes easy to determine the missing one if any three of these four items is known to us. In break-even analysis, some of the specific uses of contribution are:

a. Break-even point determination; b. Profitability of products assessment; c. Different departments selling price determination; d. The optimum sales mix determination.

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Key factor or Limiting factor:

There are always factors which, for the purpose of managerial control, do not lend themselves. For example, if at a particular point of time, on the import of a material, which is the principal element of companys product, there is a restriction of Government, then the production cannot be undertaken by the company, as it wishes. Production has to be planned after taking into consideration this limiting factor. However, towards the maximum utilization of available sources, its efforts will be directed. Thus, limiting factor is a factor, by which, at a given point of time, the volume of output of an organization gets influenced.

Key factor is the factor whose influence, for the purpose of ensuring the maximum utilization of resources, must be ascertained first. Profit can be maximized by gearing the process of production in the light of influences of key factors. Managerial action is constrained & output of company is limited by key factor. Any of the following factors can be a limiting factor, although usually sale is the limiting factor but:

(a) Material (b) Labour (c) Power (d) Capacity of plant (e) Action of government. When, in operation, there is a key factor & regarding relative profitability of different products, a decision has to be taken, then for selecting the most profitable alternative, contribution for each product is divided by key factor.

With the products or projects, the choice of management rests with, thereby showing more contribution per unit of key factor. Thus, if the key factor is sales, then consideration should be given to contribution to sales ratio. If labour shortage is faced by the management, then consideration should be given to contribution per labour hour. Suppose sales of product X & Y are $ 200 & $ 220 & variable cost of sales are $ 60 & $ 46. The labour hours (key factor) required for these products are 4 hours & 6 hours respectively.
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