Topics covered: Costs and revenues
- Fixed cost
- Variable cost
- Semi variable cost
Jean & Jean is a successful manufacturer of designer garments. The company claims that Jean & Jean ‘s flagship brand J&J is one of their strengths. The company strongly believes in market orientation approach as competition is very intense and spends significant funds on market research.
JJ has two high-tech manufacturing units in Mumbai. Manufacturing units are leased for 10 years and the company pays annual lease of $ 10,000. The entire production system is automated from the raw material stage to the final product. Senior production managers at each stage of production ensures quality and the company has achieved zero defects. The employees at all stages are given both on the job and off- the job training.
30 % of the production requirements of the raw materials imported from neighboring countries like Sri Lanka, and Bangladesh. Locally sourced raw materials require further cleaning and processing before they are used in manufacturing. JJ hires casual employees and they are paid piece rate.
About 70 % of the output is exported to European countries where the JJ’s brand is highly recognized. In the domestic market, ready products sold through company owned sales outlets, company website and third party ecommerce websites like eSell, Quick Buy, etc.
Though the company offers good training to all employees, the HR manager is worried about the increasing labor turnover rate. Though the overall sales increasing, due to a high level of credit sales in the domestic market, and increasing interest rate on long term loans, the company faces cash crunch especially during winter season. Competition is getting intensified, however, the demand for JJ’s product is increasing steadily.
Questions:
- With reference to JJ, explain the term fixed cost [ 2 marks]
- With reference to JJ, explain the term variable cost [ 2 marks]
- With reference to JJ, explain the term semi-variable cost [ 2 marks]
- Distinguish between fixed cost and variable cost [ 4 marks]
