CASE STUDY Economics case studies Covering micro as well as macro economics, some of case studies requires a prior

understanding of certain economic concepts, while many case studies can be used to derive the underlying economic concepts. Topics like Demand and Supply Analysis, Market Structures (Perfect Competition, Monopoly, Monopolistic, etc.), Cost Structures, etc., in micro economics and national income accounting, monetary and fiscal policies, exchange rate dynamics, etc., in macro economics can be discussed through these case studies. These short case studies will help you to understand how business economics can be applied in real business situations. Each case study is accompanied by questions to encourage critical thinking. Every case study has 7 steps they are, 1. Identifying the problem 2. Defining the problem 3. Analysing the problem a. Brief profile of the company or case b. Rows involved c. Nature and factors of the company or case d. Investigator 4. Generating alternatives 5. Evaluation of alternatives 6. Select the best alternative 7. Implementation of frame work (or) Conclusion (or) Q&A Formula: Managerial cost statement Sales xxxx Less variable cost 1. Direct labor xxxx 2. Direct material xxxx 3. Direct expenses xxxx xxxx Contribution ------------------- xxxx Less fixed cost xxx Profit -------- xxx 1. Sales variable cost = contribution 2. Contribution fixed cost = profit 3. Pv ratio = (contribution)/(sales)*100 (or) when 2years sales given Pv ratio = (change in profits)/(change in sales)*100 4. B.E.P(Break even point) in rupees = (fixed cost)/(Pv ratio) (or) B.E.P in units = (fixed cost)*(sales)/(contributions) 5. Sales required to desired profits Sales = (fixed cost + desired profits)/(Pv ratio) Profit when sales are given, Profit = New sales (or) future sales * pv ratio fixed cost 6. Margin of safety = Actual sales BEP sales (or) (Profit) / (Pv ratio) 7. B.E.P units Fixed expenses = (fixed expenses)/(selling price for unit variable cost per unit) Fixed cost = (contribution) * (given units) Sales = fixed cost + profits + variable cost

In the linear Cost-Volume-Profit Analysis model (where marginal costs and marginal revenues are constant, among other assumptions), the break-even point (BEP) (in terms of Unit Sales (X)) can be directly computed in terms of Total Revenue (TR) and Total Costs (TC) as:

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:

To calculate the break-even point in terms of revenue (a.k.a. currency units, a.k.a. 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. Problem 1: Sales 3,30,000 Fixed cost 1,00,000 Selling price 100rs Variable cost 50rs per cost. Calculate Pv ratio, B.E.P and Margin of safety Pv ratio = (Contributions)/ (sales)*100 Note: Here sales are given and selling price per unit is given but the variable cost in units and fixed cost in total amount by converting fixed cost into unit cost on variable cost * total variable cost. Solution: Sales units = (Sales)/ (selling price unit) = 3, 30,000 / 100 = 3,300 units Variable cost = 50 * 3,300 = 1, 65,000 Rs 1. Contribution = Sales Variable cost = 3,30,000 -1,65,000 = 1,65,000 2. Profit = contribution fixed cost =1,65,000 1,00,000 = 65,000 3. Pv ratio = (contribution) / (sales) * 100 = 1,65,000/3,30,000*100 = 50% 4. (i) B.E.P(rs) = Fixed cost / Pv ratio = 1,00,000/50% = (1,00,000/50)*100 = 2,00,000 (ii) B.E.P(units) = (fixed cost * sales) / contribution = (1,00,000*3,30,000)/1,65,000 = 2,00,000 5. Margin of Safety = Actual sales B.E.P sales = 3,30,000 2,00,000 = 1,30,000 6. B.E.P units Fixed expenses = (Fixed expenses)/(Selling price per unit Variable cost per unit) = 1,00,000/100-50 = 2000 units Conclusion: Hence the calculations ar made from the given problems the margin of safety is 1,30,000 or 13000 units and the profit valuing ratio is 50% and the B.E.P units 2000, total 2,00,000 because of converting the variable cost units into variable cost or fixed cost. Problem 2: Find the profit based on the following data, Fixed cost 5,00,000 Variable cost per unit 10 Selling price 15 Output level 1,50,000(sales)units Selling price total = Output level * Selling price = 1,50,000*15

= 22,50,000 Sales = 22,50,000 Total variable cost = Output level * Variable cost = 1,50,000 * 10 = 15,00,000 Contribution = Sales variable cost = 22,50,000 15,00,000 = 7,50,000 Profit = Contribution Fixed cost = 7,50,000 5,00,000 = 2,50,000 Pv ratio = (Contribution/Sales)*100 = (7,50,000/22,50,000)*100 = 33.3% Conclusion: As per my calculations from the given problem with various costs and amounts the profit will be 2, 50,000. Problem 3: A manufacturer buys certain components for producing X at Rs.20 per unit. If he has to make these components it would require a fixed cost Rs.15, 000 and average variable cost Rs.5. His present requirement is 1000 units of these components. Advise him whether he should make or by them, if he intends to double the point. Solution: In this case we need to measure the BEP of the components thus; TFC BEP = --------P- AVC Here, for P we have to take the purchase price. 15,000 15,000 . . BEP = ------------ = ------------ = 100 20- 5 15 At 1000 units requirement it makes no difference whether the firm buys or makes the Conclusion: components. But, when requirement increases, it is profitable to make the components. Problem 4: A firm starts its business with fixed expenses of Rs.60, 000 to produce commodity X. Its variable cost is Rs.2 per unit. Prevailing market price of the product is Rs.6. How much should the firm produce to earn profit of Rs.20, 000 at this price? Solution In this case we have to determine target profit sales volume (TPS) by using the formula; TFC Target Profit TPS = -------------------------Contribution Margin Contribution Margin = Price AVC = 6-2 = Rs.4 .

. 60,000 20,000 40,000 .. TPS = ------------------------ = ----------- = 10,000 4 4 Conclusion: The firm should produce 10,000 units of X to earn targeted profit of Rs. 20,000 per unit of time. Case-Study on Optimum Input Combination Illustration;5 An industry is manufacturing output using labour and capital in such volumes that marginal product of labour is 30 and marginal product of capital is 16. The remuneration rate of labour is $6 and price of capital is $4. Does the industry using effective factor of combination for production or else what must be done to accomplish economic efficacy? Solution Effectiveness stipulation for factor use that is optimum combination of factor) needs that the following condition should be fulfilled. MPA = MPB r p Now, MPA = 30 r 6 MPB = 16 p 4 As 30 > 16 6 4 Conclusion ; The given factor combination cannot therefore be effective or optimal factor combination for the reason that the industry is getting more output from a dollar expended on labour than in capital. To accomplish economic efficacy in the use of resources and to optimise profits the firm must surrogate labour for capital and hence MPA parities MPB r p Illustration :6 Consumer product manufacturing company hear says the following data about its manufacture and factors used: O B A O B A 550 30 90 525 25 120 600 30 120 600 30 120 Where O is the output, A is the labour and B is the capital. If the remuneration rate of labour is $10 and price of capital is $20, does the combination of input of 30B and 120A denotes the least cost factor combination? If not must it use more labour and less capital or less labour and more capital? Solution Least-cost combination factor needs that the following situation must be met. MPA = MPB r p Where r is remuneration and p is price of capital. Now, in the given problem, when factor combination is changed from 30B + 120A to 30B + 90A, the productivity decreases by 50 units that is (600 550). Therefore, MPA = 50. Likewise, when factor combination is changed from 30B + 120A to 25B + 120A, the productivity decreases to 75 units that is (600 525). Therefore, MPB = 75. Substituting

these values of marginal products of labour and capital and the factor prices in the condition for least cost factor combination, we have the following: MPA = MPB r p 50 > 75 10 20 The company will utilise more capital and less labour as output per unit of a dollar (50 / 10 = 5) spent on it is greater than the output per unit of a dollar (75 / 20 = 3.75) spent on labour. Illustration :7 Given the production function O = 200B^0.5A^0.5. Ascertain the maximum input combination for producing 2000 units of output if remuneration rate of labour (r) is $60 and price per unit of capital (p) is $80. what is optimum cost of production? Solution The given production function is O = 200B^0.5A^0.5 MPA = dO = 200 * 0.5B ^ 0.5A^-0.5 dA = 100B^0.5 A^-0.5 MPB = dO = 200 * 0.5B^-0.5 A^0.5 dB = 100B^-0.5 A^0.5 MPA = 100B^0.5^-0.5 = B MPB 100B^-0.5^0.5 A In equilibrium MRSAB = MPA = r MPB p Therefore, in optimal input combination, B / A = r / p Or, B = r.A P To obtain the value of A we are to substitute B = r / p * A in the production function with O = 2000 units. Therefore, 2000 = 200B^0.5A^0.5 = 200 (r.A) ^0.5 A^0.5 p 2000 = 200 * A (r) ^ 0.5 (p) Substituting the values of r = 60 and p = 80 2000 = 200 A * (60) ^0.5 (80) 2000 = 200 A * 0.75^0.5 = 200 A * 0.866 = 173.2A A = 2000 / 173.2 = 11.55 Now, using the equation for expansion path (B = r / p . A), we can procure the value of B by substituting the values of A, r and p. Therefore, B = 60 * 11.55 80 = 8.67 Therefore, maximum combination of inputs comprises of 11.55 units of labour and 8.67 units of capital. This will make sure minimum feasible cost for producing 2000 units of output.

In order to ascertain this minimum cost we substitute the maximum values of A and B procured above and the given prices of labour and capital (i.e. r and p) in the cost function. Therefore, F = rA + pB = 60 * 11.55 + 80 * 8.67 = 693 + 693 = 1386 Therefore, minimum cost of producing 2000 units of output is $1386. Illustration :8 Given that: O = 200B^0.5 A^0.5, F = $1600, r = 60, p = 80. Ascertain the volume of labour and capital that the industry must use with respect to optimise output. What is this level of output? Solution The problem of restrained optimisation is: Optimise O = 200 ^ A ^ Subject to cost restraint: 1000 = 60A + 80B MPB = dO = 1 200 * B^- A^ dB 2 MPA = dO = 1 200 * B^ A^- dA 2 MPB = 100B^- A^ = A ..Equation (1) MPA 100B^ A^ - B For output optimisation MPB = p ..Equation (2) MPA r Substituting MPB = A and r = 60 and p = 80 in Equation (2) we have MPA B A = 4 or 4B ..Equation (4) B 3 3 Putting the value of A = 4 B in the cost restraint equation we get, 3 1600 = rA + pB = 60 * 4B + 40B 3 = 80B + 40B B = 1600 / 120 = 13.33 Substituting B = 40 in the cost restraint equation we get, 1600 = 60 * A + 80 * 13.33 = 60A + 1066.4 60A = 1600 1066.4 = 533.6 A = 533.6 / 60 = 8.9 Therefore, output maximising amounts of capital and labour are 13.33 and 8.9 correspondingly. To get the level of output produced we substitute these amounts of capital and labour in the given production function. O = 200B^ A^ O = 200 13.33 * 8.9 = 200 * 118.6 = 200 = 2178