COST STRUCTURE OF THE FIRMS.

Added on - 20 Sep 2019

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COST STRUCTURE OF THE FIRMSIV) Examine the cost of the firmsa)Various types of the costs which the firm faces is same for all the firms. There are differentinputs used by the firms like land, labour, technology and entrepreneurship. Now some ofthe inputs remain fixed for the firms because of their high cost and also because they canproduce proportionately. So fixed cost for the coco Cola Company can be the brandingvalue, the machinery used to produce, the variable cost for the firm will be the number ofworkers working in the company, the cost for the transportation. Because they can hiretransportation so that when they have high demand they can use more trucks and less whenthey have less demand. The general trend in the fixed and variable cost can be representedas –So when we look at the profitability, we can see from the graph that if we increase the fixedcost the profit will decrease because variable cost can be recovered with prices but we haveto ensure that fixed cost are not so high that they turn to sunk cost when there is anychange in the plan for the company to shut down.b)Now we have to look at the effect of various costs based on the output decision front. Sofirst we classify some costs as variable and fixed and then we will comment if they impact onlarge scale or small scale. So first is the raw materials, which is the variable cost and is mostimportant variable cost because without it we can’t produce the output. Now comes themachinery which is the fixed cost because once we buy machinery we have to operate itirrespective of the output level. Yes we can definitely manipulate the output level butinitially we have to pay full cost to buy. Like we say in the case of Coca cola is the machineryto filter the water, machinery to pack the bottles, etc. Now third comes the labour which isalso a variable cost because it is according to the production level that we use the labour.When we look at Research and Development, this is again a fixed cost because we hirepeople on different posts and then we have to pay them whether there is some research ornot, until unless we outsource it we can’t reduce cost but because the formula is the USP forthem we can’t basically outsource R and D. Now the output decision will be effected in the
sense that if there is more than proportionate input required to produce the output whichmay be due to the shortage of supply, or maybe due to increased cost of the inputs, we willdecrease the supply of final output. When we have abundant inputs like the labour is cheap ,operating cost of machine is cheap, R and D is not enough then we can supply more at lessprices thus output is entirely dependent on the cost of the production. So long term costimpact the output of the firms not so much because in the long term profit matters and notthe output whereas in short run output matters more because with low prices and highoutput we can increase the profits.V) Overall Market for the firma) So market share of the firm depends on different characteristics like the origin they are sellingand what is their target group. Now we all are aware that Coca Cola produces products whichare readily used by all age groups. Currently Coca Cola in the carbonated drinks market have48.6 % of the market share, where the global market is predicted at 341.6 billion USD.The main competitor of the Coco Cola has been the Pepsi which can be seen by the above graph. Butthe performance of the Coca Cola has always surpassed that of Pepsi.
The market share can be seen here in the above graph for the Coca Cola Company.The revenue can be seen from the following graph which says that, coca cola needs some newstrategies to invest.b-When we talk about the barriers to entry in the area. There are several barriers which arevery self-understanding. Some of the main barriers to the entry are the CapitalRequirements. The machinery in this field are very high end and thus require very high initialcost. The branding is yet another barrier to entry because the major market is concentratedin the hands of just few partners. So even if the players try to enter the field, either they willget acquired by the giants or they have to survive with very high product differentiation. Thishas happened with many brands which have try to venture into flavoured mineral water andenergy drinks rather than conventional carbonated drinks. Advertising cost is yet another
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