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...........
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 from 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 previous analysis 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..................
Exhibits
Exhibit I: Annual Operating Costs (for one shift)
Exhibit II: Production Costs and Revenue