This document contains an analysis of costs, market forces, and competitors for PGMAX (2014-2015). It includes sections on cost concepts, cost functions, short-run and long-run costs, economies of scale, and cost-volume-profit analysis. Market and competitor analyses cover market size, share, trends, Porter's Five Forces model, and assessing strengths and weaknesses of competitors. Break-even analysis calculations are shown for a example company.

1. COST ANALYSIS
MARKET AND COMPETITIVE ANALYSIS
PGMAX (2014-2015)
Deepak Gupta (Roll no. 8)
Anupam Ghosh (Roll no. 6)

2. Contents
Deepak
 Theory of Costs
 Cost Functions
 Short Run Cost
 Long Run Cost
 Economics Of Scale
 Internal Economics
 External Economics
Anupam
 Cost Volume Profit Analysis
 Break-even Analysis
 Break-even Point
 Market Analysis
 Competitor Analysis
 Porters’s Five Forces Model

3. Theory Of Costs
Accounting Cost concepts
• Opportunity cost and Actual cost
• Explicit and Implicit costs
Analytical Cost concepts
• Fixed and Variable cost
• Total, Average and Marginal costs
• Short Run and Long Term Costs
• Historical and Replacement costs

4. Accounting Costs
• Opportunity Cost: It is defined as expected returns from the next best use of
resources which are foregone due to scarcity of resources.
• Actual Cost: These are actually incurred by firm in payment of labour, material,
plant, building, equipment, travelling , transport, advt etc.
• Explicit Costs: Actual costs entered in books of accounts. Like wages, insurance
premium, depreciation charges etc.
• Implicit Costs: These do not take the form of cash outlays, nor do they appear in
accounting system.

5. Cost functions
• Cost functions are derived functions. They are derived from production function ,which
describes the efficient method of production at any one time.
Both in Short run and Long run, total cost is a multivariable function.
That is, total cost is determined by many factors.
Symbolically
C(L)=f(X,T,P)
C(S)=f(X,T,P,K)
Where
C=Total cost X=Output T=Technology K=Fixed Factors
P=Price of Factors
Cost curves imply cost is a function of output C=f(X)

6. Short term costs
Short run costs are accumulated in real time throughout the production
process. Fixed costs have no impact of short run costs, only variable
costs and revenues affect the short run production. Variable costs change
with the output. Examples of variable costs include employee wages and
costs of raw materials. The short run costs increase or decrease based on
variable cost as well as the rate of production.

7. Long Term costs
In the long run there are no fixed factors of production. The land, labor,
capital goods, and entrepreneurship all vary to reach the long run cost
of producing a good or service. Examples of long run decisions that
impact a firm's costs include changing the quantity of production,
decreasing or expanding a company, and entering or leaving a market.

8. Short Run Costs
• In traditional theory of firm, total costs are split into two groups:
Total fixed costs and Total variable costs.
• TC=TFC+TVC
• Fixed costs includes Salaries, Depreciation of machinery, expenses for land
maintenance etc.
• Variable costs includes raw material, costs of direct labor, running expenses of fixed
capital fixed capital like fuel, ordinary repairs and routine maintenance.

9. Total Cost Curve
• By adding TFC and TVC we obtain the TC of the firm

10. Average total cost / Marginal cost
• Average fixed cost=Total fixed cost/Output(X)
• Average Variable cost=Total variable cost/Output(X)
• Average Total cost=Total cost/Output(X)=(TFC+TVC)/X
• Marginal Cost=It is defined as the change in TC which results from unit
change in output.

11. Summary
• In Summary: The traditional theory of costs postulates that in short run the cost curves
(AVC,ATC,MC) are V Shaped reflecting the law of variable proportions. In the short run
with a fixed plant there is a phase of increasing productivity(falling unit costs) and a phase
of decreasing productivity (increasing unit costs ) of variable factors.
• Between these two phases of plant operation there is a single point at which unit costs are
minimum. When this point is reached the plant is utilized optimally. That is with the optimal
proportions of fixed and variable factors.

12. Long Run Total Cost Curve

13. Long Run Costs
• In long run all factors are assumed to become variable. The long run average cost curve is derived
from short run cost curves. Reach point on LRTC corresponds to a point on a short run cost curve
which is tangent to the LRAC at that point.

14. U Shape of LRATC
• A serious assumption of traditional U shaped cost curves is that each plant size is
designed to produce optimally a single level of output. Any departure from that no
matter how small leads to increased costs. The plant is completely inflexible. There is
no reserve capacity ,not even to meet seasonal variations in demand. As a
consequence of this assumption the Long Run Average curve envelops the short run
Average cost curve.

15. Economics Of Scale
• When more units of a good or a service can be produced on a larger
scale, yet with (on average) less input costs, economies of scale (ES) are
said to be achieved. Alternatively, this means that as a company grows
and production units increase, a company will have a better chance to
decrease its costs. According to theory, economic growth may be
achieved when economies of scale are realized.

16. Internal Economies
• Alfred Marshall made a distinction between internal and external
economies of scale. When a company reduces costs and increases
production, internal economies of scale have been achieved.

17. External Economies
• External economies of scale occur outside of a firm, within an industry.
Thus, when an industry's scope of operations expands due to, for
example, the creation of a better transportation network, resulting in a
subsequent decrease in cost for a company working within that industry,
external economies of scale are said to have been achieved. With
external ES, all firms within the industry will benefit.

18. Cost Volume Profit Analysis

19. Cost Volume Profit analysis
• CVP analysis studies the relationship between expenses, revenues and net income.
• The aim is to establish what will happen to financial results if a specified level of
activity or volume fluctuates.
• Breakeven analysis can be used to determine a company’s breakeven point (BEP)
• Breakeven point is a level of activity at which the total revenue is equal to the total
costs.
• At this level, the company makes no profit.

20. Assumption of BEP analysis
• Relevant range
– The relevant range is the range of an activity over which the fixed cost will remain fixed
in total and the variable cost per unit will remain constant
• Fixed cost
– Total fixed cost are assumed to be constant in total
• Variable cost
– Total variable cost will increase with increasing number of units produced
• Sales revenue
– The total revenue will increase with the increasing number of units produced

21. Key Terminology: Breakeven Analysis
• Break even point - the point at which a company makes neither a profit
or a loss.
• Contribution per unit - the sales price minus the variable cost per unit. It
measures the contribution made by each item of output to the fixed costs
and profit of the organisation.
• Margin of safety - a measure in which the budgeted volume of sales is
compared with the volume of sales required to break even

22. Breakeven Points
• Break-even Quantity:
QB = TFC
P – AVC
• Break-even Sales:
QS = TFC
1 – (AVC / P)
• Break-even Percentage:
QP = TFC x 100
(P – AVC) Qmax
• TFC = Total Fixed Cost
• P = Selling Price per unit
• AVC = Avg. variable Cost per Unit
• Qmax = Maximum Quantity

23. Breakeven Chart

24. Problem
Calculate the followings based upon following data:
1. Break-even Quantity
2. Break-even Sales
3. Break-even Percentage
4. Margin of safety Sales
5. Margin of safety Quantity
6. Targeted Profit
Data
•Max. units can produced = 1,00,000
•Selling Price / Unit = Rs.850
•Variable Cost / unit = Rs.100
•Fixed Cost / month= Rs.75,00,000
•Profit Target = Rs.75,00,000

25. Solution
1. Break-even Quantity:
QB = TFC = Rs.75,00,000 = 10,000 Units
P – AVC Rs.850 – Rs.100
2. Break-even Sales:
QS = TFC = Rs.75,00,000 = Rs.85,00,000
1 – (AVC / P) 1 – (Rs.100 / Rs.850)
3. Break-even Percentage:
QP = TFC x 100 = Rs.75,00,000 = 10% of 1,00,000 = 10,000 Units
(P – AVC) Qmax (Rs.850 – Rs.100) (1,00,000)

26. 4. Margin of Safety:
In Units = Total Unit Capacity – Break-even unit point
= 1,00,000 – 10,000
= 90,000 Units
In Sales = Total Sales Capacity – Break-even sales point
= (1,00,000 x 850) – (10,000 x 850)
= Rs.76,50,00,000
5. Targeted Profit:
Unit = Rs.75,00,000 + Rs.75,00,000 = 20,000 Units
Rs.850 – Rs.100
Sales = Rs.75,00,000 + Rs.75,00,000 = Rs.1,70,00,000
1 – (Rs.100 / Rs.850)
Percentage = Rs.75,00,000 + Rs.75,00,000 = 20%
(Rs.850 – Rs.100) (1,00,000)

27. Limitations of B/E analysis
• Breakeven analysis assumes that fixed cost, variable costs and sales revenue
behave in linear manner. However, some overhead costs may be stepped in
nature. The straight sales revenue line and total cost line tent to curve beyond
certain level of production
• It is assumed that all production is sold. The breakeven chart does not take the
changes in stock level into account
• Breakeven analysis can provide information for small and relatively simple
companies that produce same product. It is not useful for the companies
producing multiple products

28. CVP Analysis
• It is attempt to apply BE analysis for multi-product firms.
• It enables the prediction of costs and profits for different volumes of activity.
• It is useful in setting up flexible budgets.
• It helps in performance evaluation for the purpose of control.
• It helps in formulating price policies by projecting the effect on costs and
profits.
• The study of CVP analysis is necessary to know the amount of overhead costs,
which could be charged to products costs at various levels of operation.

29. Profit Volume (P/V) Ratio
• This ratio indicates the contribution earned with respect to one rupee of sales.
• It is also known as Contribution Volume or Contribution sales ratio.
• Fixed costs remain unchanged in the short run, so if there is any change in
profits, that is only due to change in contribution.
Contributions
P/V Ratio =
Sales

30. Market Analysis
• Market = A Collection of
Businesses and
Customers
• Features to Understand:
– Market Size
– Market Share
– Market Trends
– Market Growth Rate

31. Market Segment
• The part of the market you will operate in
• SWOT focuses on what impacts the segment
Segment Analysis
• What is important to customers?
• Customer view of your vs. competitor
• Trends impacting segment

32. Competitor Analysis
• Always competitors!
• Purpose:
– Identify top competition
– Determine strengths/weaknesses of competition
– Develop strategies based on analysis to increase success
• Analyze successful and unsuccessful competitors

33. Who is a Competitor?
• Companies with a product/service addressing similar needs
• Products/services considered to be close substitutes
• Don’t define too narrowly
• Analyzing broader competitors allows for innovation maximization
Analyzing Competitor Information
• With which businesses you should actually compete
• What new things competitors will try to do
• How competitors react to other businesses’ actions
• How to use the competitor’s behavior to your advantage

34. PORTERS’S FIVE FORCES
Threat of
new
entrants
Rivalry
among
existing
competitors
Bargaining
power of
buyers
Threat of
substitutes
Bargaining
power of
suppliers

35. Threat of New Entrant
Production costs
•Are there any economies of scale?
•What are the capital requirements?
•What is the absolute cost advantage?
Brand
•How different is the product?
•How strong is the brand identity?
•How high are the switching costs?
Distribution
•Is it easy to access distribution channels?
•What are the government policies?

36. Power of suppliers
Substitution
•What are the switching costs of suppliers and
firms in the industry?
•Is there any presence of substitute inputs?
Players
•What is the suppliers’ concentration?
•How high is the concentration of suppliers?
Integration
•What is the suppliers’ threat of forward
integration?
•What is the buyers’ threat of backward
integration?

37. Power of Buyers
Buyer‘s type
•How strong is the difference between buyer
concentration vs. firm concentration?
•What is the buyer volume?
•What are the buyer switching costs relative to the
firm’s switching costs?
•Is the buyer capable of backward integration?
Information
•How much information does the buyer have?
•Are they attracted by substitutes?
•How much does product differences effect the buyer?
Brand awareness
•How does the buyer judge the brand identity?
•How high is the impact of quality/performance?

38. Threat of Substitutes
What is the relative price performance of substitutes?
•What are the prices of my products comparatively?
•Are the substitute prices stable? (increase or decrease)
How high are the switching costs?
•What are the differences relative to my products?
•What would the costs incurred be to change my products?
What is the buyer propensity to substitute?
•What are the buyers preferences on the product category?
•What are the differences regarding my products? (quality, prices)

39. Rivalries among existing competition
Competitors
•How many direct or indirect competitors are
there?
•What are the size of my competitors?
•How diverse are my competitors?
Industry
•What is the industry growth rate?
•What are the strategic stakes?
Products
•How different is my product?
•What are the buyers’ switching costs?

40. Thank You…!