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Production Dilemma at Amiko: Short-run or Long-run Costs?

CASELET, MANAGERIAL ECONOMICS
ET Cases, 3 pages
AUTHOR(S) : Syed Abdul Samad and Dr. Nagendra V. Chowdary

Case Preview

Production Dilemma at Amiko: Short-run or Long-run Costs?

 

Amiko Garments Pvt. Ltd. (Amiko), is a garment manufacturing unit, in Faridabad, set up by Amit Kothari (Kothari) in 2010. Amiko is a contract manufacturer of denim jeans, for men and women, for various European brands. The company was established as a small scale manufacturing unit, as the investment made in the plant and machinery was between 25 lakh and 5 crore. Kothari invested 30 lakh and borrowed 50 lakh from a bank at an interest rate of 12% per annum for 15 years.

Kothari set up the manufacturing unit in a rented building with a rent of 50,000 per month. The manufacturing setup had 80 sewing machines that cost 25,000 each, one cutting machine costing 50,000, two finishing machines that cost 20,000 each, two washing machines at 1,50,000 each and two dryers at 1,50,000 each. Other miscellaneous items included chairs, tables, furniture, stationary, etc., which cost around 2 lakh. The setup also incurred costs of 3 lakh towards establishment charges, company registration, trial run and website development...........

Teaching Note Preview

Production Dilemma at Amiko: Short-run or Long-run Costs?

 

Synopsis

This caselet enables the students/participants to understand the concept and applicability of various types of costs related to production. Amit Kothari (Kothari) established Amiko Garments Pvt. Ltd. (Amiko) as a small scale garment manufacturing unit with the production capacity of 2,000 garments per day. The company receives a long-term order for manufacturing 3,000 garments per day. Kothari faces a dilemma whether to take up or reject the order as his factory would need extra capacity to fulfil the order. The analysis of the caselet facts (with regards to Short-run and Long-run costs), sensitizes the participants to the related concepts and help them in effective decision-making in the context of Kothari’s dilemma.

Prerequisite Conceptual Understanding (PCU)/Before the Classroom Discussion

The participants should be asked to read the following chapter to help them connect the concepts discussed in the caselet:

  • • Paul A. Samuelson, et al., “Analysis of Costs”, Economics, 19th Edition (Special Indian Edition), McGraw Hill Education (India) Private Limited, 2014 – To understand the various types of costs involved in production function and their applicability to a wide range of business decisions

 

Case Positioning and Setting

The caselet can be used in MBA or Executive MBA or Executive Development Programs, for the following modules/topics:

  • • Analysis of Costs – To understand the various types of costs and their applicability namely, Total Cost, Fixed Cost, Variable Cost, Average Total Cost, Marginal Cost, Average Variable Cost, and Average Fixed Cost

 

Assignment Questions

  • I. What do you understand by Fixed Costs (FC), Variable Costs (VC), Stair-step Variable Costs (SVC) and what is the relevance of those costs in decision-making? From Exhibit I of the caselet, and the facts outlined in the caselet, segregate the costs into Fixed Costs and Variable Costs.
  • II. What do you understand by Short-run in Economics and Short-run Costs or Short-run Cost-Output relationship? Based on your analysis for the previous assignment question and with the help of Exhibit II of the caselet, derive the relevant Total Variable Cost (TVC), Marginal Cost (MC), Average Fixed Cost (AFC), Average Variable Cost (AVC) and Average Cost (AC). What are the salient features of the relationship between these costs?
  • III. .............................

 

Preamble to the Caselet Analysis and Suggested Orchestration

This caselet’s purpose is to introduce the participants/students to the concepts of Short-run and Long-run Average Costs along with an overview of break-even analysis. While Amiko has been doing quite well with reasonable profits, Amit Kothari (Kothari) was in a dilemma whether to accept a long-term order for 3,000 denim jeans per day. To resolve this dilemma, the students were to understand the Long-run Average Cost (LAC) analysis and apply the same to help Kothari resolve his dilemma. Accordingly, this caselet was orchestrated in the following way [Exhibit (TN)-I]...............


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Abstract


This caselet is meant to introduce the participants/students to the concepts of various types of costs associated with production and the relationships between them through the production dilemma faced by a garment manufacturer. Amiko Garments Pvt. Ltd. (Amiko) is a small scale garment manufacturing unit with an installed capacity of 2,000 garments per day. However, the company faces a dilemma when it receives a long-term order for manufacturing 3,000 garments per day. The owner of the firm, Amit Kothari (Kothari), was in two minds, whether to take up or reject the order as he would need extra capacity to fulfill the order. Should Kothari accept the order? The analysis of the caselet facts with regards to Short-run and Long-run costs will enable the students/participants to be sensitized to the related concepts and empowers in effective decision-making.



Pedagogical Objectives

  • To understand the concepts of Short-run Costs (Short-run Cost-Output relationships) associated with production and examine the relationships between Fixed Cost (FC), Average Fixed Cost (AFC), Average Variable Cost (AVC) and Average Cost (AC)
  • To understand the concept of Long-run Average Cost (LAC) and debate on why LAC is popularly known as an Envelope Curve and examine how an understanding of this can help resolve Amiko’s dilemma on whether to accept additional order of 3,000 jeans per day?
  • To have an overview of the concept of Cost-Volume-Profit analysis and calculate the relevant Break-Even Point (BEP) (in value and volume terms) for Amiko’s production levels

Case Positioning and Setting
The caselet can be used in MBA or Executive MBA or Executive Development Programs, for the following modules/topics:

  • Analysis of Costs - To understand the various types of costs and their applicability namely, Total Cost, Fixed Cost, Variable Cost, Average Total Cost, Marginal Cost, Average Variable Cost, and Average Fixed Cost




This Case Pack Includes:
- Abstract
- Caselet
- Teaching Note (**ONLY for Academicians)
$3.66
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