ESTIMATED

PRODUCTION
FUNCTION, COST
CONCEPTS AND
BREAK EVEN
ANALYSIS
PRODUCTION
THEORY
 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
Production function
 Functional and technical relationship
between input and output

 Generally written as Q = ƒ(K, L, etc)

 Where Q= qty of output produced

K,L,etc = factors of production

 Characteristics of production Function.

 Assumptions of production function.

Managerial use of Production
Function
Cobb-Douglas Production
Function
 It is stated as
Q = KLaC(1-a)
where Q= output
L= qty of labour employed
C= qty of capital employed
K is positive constant
‘a’ is positive fraction
Laws of production
 Law of Diminishing Returns
or 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
 Causes for the Operation of the Law of
Diminishing Returns

1) Wrong combination of Inputs

2) Scarcity of Certain Factors

3) Imperfect Substitutes
Law of diminishing Returns
and Business decisions
Law of returns to Scale

 Returns to scale

 Increasing Returns to Scale

 Constant Returns to Scale

 Decreasing Returns to Scale

 COST
concepts
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
 Escapable (avoidable) and Unavoidable
Costs
 Traceable and Common Costs
 Explicit and Implicit or Imputed Costs
 Replacement and Historical Costs
 Business and Full Costs
Break-Even
Analysis
Break-Even Analysis is an analytical
technique 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
Break-Even
Point
 It is the point of no profit, no loss

 Sales at break-even point = Fixed cost + Variable

Cost
 Cost and Sales at Various Levels
of Output
Total Revenue AR TFC TVC TC AC
Output (price per unit
Rs 5)

0 0 0 50 0 50 0
10 50 5 50 40 90 9
20 100 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
Calculation of Break-Even Point
in 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
CONTRIBUTION

 C = Selling price – Variable Cost

 C = Fixed Cost + Profit

Uses of Break-Even
Analysis
Graphical presentation of
Break-Even Analysis

Margin of safety (Rs)

Angle of
y Incidence
TR
TC
COST/REVENUE (Rs)

Profit Area

B.E Sales Margin of safety (units)

250
B
Loss Area B,E units

TFC LINE
50

0 50 x
OUTPUT UNITS
 Assumptions of Break-Even
Analysis
 Limitations of Break-Even
Analysis