ANALYZING THE COST

OF H’LAT COMPANY

University of Finance- Marketing

International School
Principles of Economics
UNIVERSITY OF FINANCE AND MARKETING
INTERNATIONAL SCHOOL
GROUP ASSIGNMENT
SUBJECT: PRINCIPLES OF MICROECONOMICS

Class: IP-18DKQ01
By: Tran Thi Tram Anh
Nguyen Thi Que Huong
Chau Huynh Long
Nguyen Doan Phuong Thao
Lecturer: Tran Nguyen Ngoc Anh Thu

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Table of Contents
I. PREFACE: ...............................................................................................................................................1
1. Research purpose: .............................................................................................................................1
2. Why choosing this company: ............................................................................................................1
3. Research methodology:.....................................................................................................................2
II. Theory of cost ........................................................................................................................................3
1. Cost definition: ..................................................................................................................................3
2. Cost in the short run:.........................................................................................................................3
a) Explicit cost: ...................................................................................................................................3
b) Implicit cost: ..................................................................................................................................3
c) Fixed cost:......................................................................................................................................4
d) Variable cost ..................................................................................................................................4
e) Total cost .......................................................................................................................................4
f) Marginal cost .................................................................................................................................5
g) Average fixed cost .........................................................................................................................5
h) Average variable cost ....................................................................................................................5
i) Average total cost..........................................................................................................................6
3. Long Run Costs ..................................................................................................................................6
a) Long run total cost.........................................................................................................................6
b) Long run average cost ...................................................................................................................7
c) Long run marginal cost ..................................................................................................................7
*Differences ..........................................................................................................................................7
4. Profit maximization ...........................................................................................................................8
a) Profit Maximization under Perfect Competition Firm: .................................................................8
b) Profit Maximization under Monopoly Firm:..................................................................................1
5. Break even point ...............................................................................................................................1
III. Analyzing the cost .............................................................................................................................2
IV. Conclusion and recommendation .....................................................................................................4
1. Conclusion: ........................................................................................................................................4
2. Recommendation: .............................................................................................................................4
V. Work assigments ...................................................................................................................................6

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I. PREFACE:
1. Research purpose:
Since a firm cost’s are a key determinant of its production and pricing
decisions, carrying out this research will help to develop the ways to utilize economically
the materials and other natural resources for profit making purpose. Hence, the goal is to
reducing the company expense’s in order to increase more profit as much as possible. The
study would be of significant to the company in terms of analytical decision making,
inventory control and determination of the company's profit level.
Moreover, not only this research will benefit the company itself but also help
students to understand deeply what they had study in “Principles of economics” by
applying the knowledge to real situations, addressing more than just abstract principles. In
order to learn the subject and to know the unknown facts, research, detail study and full
analysis are the must. The main purpose is to get deep into the topic so that something
helpful can be churned out. On the other hand, working on a research project will
obviously be a challenging and rewarding experience, provided students put the best of
their expertise and skill in it. Objectively, it enhances the knowledge and by engaging in the
process of research, the students understand the concept in an easier manner. In other
words, the research assists in the accomplishment of the study and helps students in
knowing what needs to be done in their future.

2. Why choosing this company:

H’lat company was established under business license No.11017645532, at
first in 17th 2014. Factory is built on more than 7,000 m2 with charter capital: 7 million
USD and produce 7,000 tons finished products per year. The company’s products are
straws for dairy industry, PE film is used to wrap tightly covering the products forming.
Firm’s clients are well-known brands in Vietnam such as Vinamilk, Nestle ', Dutch Lady,
Nutifood..
Primarily, choosing this family-owned business will help to hold an overview
of the market on the nationwide scale and understand the reality of Vietnam’s company in
particular. There is no denial that it is easier to access and approach the financial
information as a family-based company.
In fact, by choosing this company, students will have a chance to understand
thoroughly in finding out how to start-up a business and run it smoothly. Also, by using
what had been learned in “Principle of economics” in this scenario, students are able to
have a bigger picture of what is purely theoretical and how it can be apply and benefit for
the company.
Since having a family ownership, there are various advantages when choosing
this company. This report allows students to analyze the information collected and then
evaluate the financial performance, quality and efficiency of the company. Consequently,
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this will help to see whether the company is having any errors or mistake in doing the
business. In a little more detail, the recommendations of this report will has both the ability
to influence the vision of the business and the willingness to use this ability to pursue
distinctive goals. In short, choosing this company enable to use outside advice and develop
a successful plan for the company in the near future.
Financial data of the company is collected from January 2019 to September
2019

3. Research methodology:
Qualitative research will be used in this report. Fundamentally, qualitative
research is a scientific method of observation to gather non-numerical data. This type of
research "refers to the meanings, concepts, definitions, characteristics, metaphors, symbols,
and description of things" and not to their "counts or measures". This research answers why
and how a certain phenomenon may occur rather than how often. Thus, qualitative research
focuses on obtaining data through open-ended and conversational communication.
There are different types of qualitative research methods like an in-depth
interview, focus groups, ethnographic research, content analysis, case study research that are
usually used.
In order to carry out a qualitative research, there are two steps needs to be done
which are data collection and analysis. Firstly, qualitative data collection allows collecting
data that is non-numeric and helps us to explore how decisions are made and provide us
with detailed insight. For reaching such conclusions the data that is collected should be
holistic, rich and nuanced and findings to emerge through careful analysis. Secondly, the
next step is analysis such as text analysis. This is a data analysis method that is distinctly
different from all other qualitative research methods, where researchers analyze the social
life of the participants in the research study and decode the words, actions etc. There are
images also that are used in this research study and the researchers analyze the context in
which the images are used and draw inferences from them. In the last decade, text analysis
through what is shared on social media platform has gained supreme popularity.

It is essential to acquire characteristics of qualitative research including real-time

data, rely on multiple data source, readable and easy to understand. For instance, qualitative
research methods usually collect data at the sight, where the participants are experiencing
issues or problems. These are real-time data and rarely bring the participants out of the
geographic locations to collect information. Since its a more communicative method,
people can build their trust on the researcher and the information thus obtained is raw and
unadulterated. This type of research method works towards solving complex issues by
breaking down into meaningful inferences, that is easily readable and understood by all.

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 From what has been analyze above about qualitative research, it would be
helpful to use this approach to carry out the research.

II. THEORY OF COST:

1. Cost definition:
In simple term, cost is defined as an amount that has to be paid or given up in order to get
something. In business, cost is usually a monetary valuation indicates the amount of effort,
material, resources, time and utilities consumed, risks incurred, and opportunity forgone
that firms spent in the process of production, distribution and delivery of a certain product
or service. Costs are often treated as expenses; however, this is a very common miss
conception since all expenses are costs but not all costs are expenses. As an illustration,
costs that incurred in the acquisition of an income- generating assets are not treated as
expenses.
It should also be mentioned that there are two types of cost: short run cost and long run
cost. These two types of costs can be distinguished by identifying whether they consist of a
fixed factor or not since while short run cost contains both fixed and variable costs, long
run one does not. Nevertheless, short run and long run cost do not only include fixed and
variable costs but also contain numerous other factors that deserve further consideration.
2. Cost in the short run:
Short run costs are costs that have short-term implications in the production process such
as payment of wages, cost of raw materials, etc. In the short-run, the level of output can
only be enhanced by increasing the variable factors such as labor and raw materials while
other factors (e.g. capital and plant size) remain unchanged. Short run costs can be divided
into several categories which are listed below:

Explicit cost:

In the operating process of a company, explicit costs (or actual costs) are considered
as the firm’s out-of-pocket costs, that is, physical payments that the company made
to others in the course of running a business. Explicit costs including the cost of
material, labor, equipment, technology, advertisement, plant and building etc. are
recorded in the books of account since they all come in the accounting concept and
will later be analyzed to evaluate the efficiency of the production system as well as
determining the accounting profit of a specific company (by taking the total revenue
and minus it with the total explicit cost).

Implicit cost:

Implicit costs (also referred to as imputed, implied, or notional cost) are costs that
have already occurred but not necessarily shown or reported as separate expenses in
the books of account. It represents an opportunity cost that arises when a company
uses internal resources toward a project without any explicit compensation for the

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utilization of resources. Simply put, an implicit cost comes from the use of an asset,
rather than renting or buying it and represents a loss of potential income, but not of
profits.

Moreover, this type of cost is also used to calculate the economic profit of a
company (by taking the total revenue and minus it with the total cost, including both
explicit and implicit costs). As an illustration, the opportunity cost occurred when an
owner of an entrepreneur allocates time toward the maintenance of a company,
rather than using those hours elsewhere and earns more profit is regarded as an
implicit cost.

Fixed cost:

An expense that does not change as the production volume of a company fluctuates
within a relevant range is a fixed cost. They are less controllable than variable costs
because they aren’t based on volume or operations and incurred even when the
firm produces nothing at all. For example, a firm has to pay the same amount of its
office’s renting fee regardless of the revenue that comes from the selling of its
products or services.

Nevertheless, fixed costs are only constant in a specific range of operations and will
change over time. Take the previous renting fee as an illustration, the company’s
rent is most likely to continue to be the same as long as the business occupies that
space; however, as the business expands, it will require more manufacturing space
which will eventually lead to an increase in the office’s renting fee if they decided to
move to a bigger building.

Variable cost

A variable cost is an expense that depends on a company's production volume

(which basically means that it rises as production increases and falls as production
decreases). Examples of variable costs include sales commissions, direct labor costs,
cost of raw materials used in production and utility costs.

Total cost

This type of cost is an economic measure that sums all expenses paid to produce a
product, purchase an investment, or acquire a piece of equipment including not
only the initial cash outlay (explicit cost) but also the opportunity cost of company’s
choices (implicit cost). Hence, it can be measured by summing up the total fixed

TC = TFC + TVC
= Cost per unit x Total Quantity
produced
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cost and total variable cost or multiplying the cost per unit with total quantity
produced.

Marginal cost

In economics, the marginal cost of production is the change in total production cost
that comes from making or producing one additional unit. For instance, the cost of
building a new plant for the purpose of producing more products of a firm is
regarded as a marginal cost.

Marginal cost is usually scrutinized in order to determine at what point an

organization can achieve economies of scale to optimize production and overall
operations. If the marginal cost of producing one additional unit is lower than the
per-unit price, the producer has the potential to gain a profit. Hence, companies
that aim to maximize their profit will produce up to the point where marginal cost
(MC) equals marginal revenue (MR).

It is calculated by dividing the change in production costs by the change in quantity

𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡

Marginal cost =
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦

Average fixed cost

In simple words, average fixed cost is fixed cost per unit of output. It is calculated by
dividing the total fixed costs of production (FC) by the quantity (Q) of output
produced and can also be measured by taking the average total cost (ATC) and
minus it by average variable cost (AVC).

𝑇𝐹𝐶
AFC =
𝑄

= ATC – AVC

It should also be mentioned that as the total number of units of the good produced
increases, the average fixed cost decreases because the same amount of fixed costs is
being spread over a larger number of units of output.

Average variable cost

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 The average variable cost (AVC) is the total variable cost per unit of output. It is
found by dividing total variable cost (TVC) by total output (Q) or by subtracting the
average total cost (ATC) by average fixed cost (AFC).
𝑇𝑉𝐶
AVC =
𝑄

= ATC – AFC

Profit-maximizing firms will use the average variable cost to determine at what point
they should shut down production in the short run. If the average variable cost of
producing a good is above the market price of this specific product, entrepreneurs
might decide to stop producing in the short run since the price is no longer covering
any portion of the fixed costs or all of the variable costs. In the contrary, if the price
of that product exceeds the average variable cost, companies are better off
continuing production as they are at least covering all variable costs and some fixed
costs.

Average total cost

Average total cost is defined as the sum of all production costs divided by the
quantity of output produced which basically means that it measures how much a
firm has to spend on each unit of output it produces and is extremely crucial in
understanding how firms set prices and the way they compete with each other. It is
calculated by taking the total cost of production and dividing it by the quantity of
units produced or by summing the average fixed cost (AFC) with the average
variable cost (AVC).

𝑇𝐶
ATC =
𝑄

= AFC + AVC

3. Long Run Costs

According to chapter 13 of The Principles of Economics 1, the cost of firms depends on
the time horizon under consideration.
The Long-run Cost is the cost having the long-term implications in the production process.
This incurred when the firm decides to change its production capacity over time in order
to respond to the anticipated economic profits and losses. The long-run decisions include
leaving or entering the market, expanding or contracting the company’s operations,
changing the quantity of production, etc.

Long run total cost

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 Long run total cost refers to the minimum cost of production. It is the least cost of
producing a given level of output. Thus, it can be less than or equal to the short run
average costs at different levels of output but never greater.

Long run average cost

Long run average cost (LAC) can be defined as the average of the cost per unit of output
in the long run. It can be calculated by the division of LTC by the quantity of output.

Long run marginal cost

Long run marginal cost is defined at the additional cost of producing an extra unit of
the output in the long-run i.e. when all inputs are variable.

*Differences

Long run costs Short run cost

No fixed factors Fixed and variable factors

The general price level and expectations Not always adjust due to the condensed
adjust fully to the state of the economy. time period.

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 4. Profit maximization
When running a business, the firm’s target is to maximize profit. To do this, it must
satisfy two rules:
 MC =MR
 MC curve make an intersection with MR curve from below

The profit maximization condition of the firm:

Maximize π (Q) π =R -C

π : Profit R : Revenue

C : Costs Q : units of output sold.

(The marginal rules and the profit maximization condition stated above can be
applicable to both perfectly competitive firm and monopoly firm.)

Profit Maximization under Perfect Competition Firm:

Under perfect competition, the firm perfect competition, the MR curve

is one individual among a large
number of producers. It cannot
influence the market price of the
product.
Firm can only decide the output to
be sold at the market price.
Therefore, under conditions of
of a firm coincides with its AR curve.
The MR curve parallel with the X-
axis because the price is set by the
market and the firm sells its output
at that price.
The firm is at equilibrium when
MC= MR= AR (Price).

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 Profit Maximization under Monopoly Firm:

There are one seller of the product under monopoly thus the monopoly firm
is the industry itself.

=>The demand curve for its product is downward sloping to the right, given the tastes
and incomes of its customers. Monopoly firms are a price-maker who may set the
price to maximize its benefits. But it does not mean that the firm can set both price
and output.

When the firm selects its output level, the price is determined by the
demanding of the market for the goods. On the other hand, when firm sets
the price for its product, the output is determined by the amount the
consumers would take at that price. In any situation, the ultimate aim of the
monopoly firm is to maximize its profits.
5. Break even point
The break-even point (BEP) or break-even level represents the sales
amount—in either unit (quantity) or revenue (sales) terms—that is required to cover
total costs, consisting of both fixed and variable costs to the company. This tool can
help businesses to calculate and determine the number of products or services a
company should sell to cover its costs (particularly fixed costs). Break-even is a
situation where are neither making money nor losing money, but all the costs have
been covered.
The break-even point is one of the most commonly used concepts of
financial analysis, many different people can use it such as entrepreneurs,
accountants, financial planners, managers and even marketers. Break-even points
can be useful to all avenues of a business, as it allows employees to identify required
outputs and work towards meeting these.
The break-even point is achieved when the generated profits match the total
costs accumulated until the date of profit generation. Establishing the break-even
point helps businesses in setting plans for the levels of production it needs to
maintain to be profitable.

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 III. Analyzing the cost
1 EXPLICIT COST

A UTILITIES / TELEPHONE 4,526,945

B DELIVERY COST

40.366.031

C MATERIAL COST

1.671.206.964

D OFFICE EQUIPMENT

16.616.332

E PRE INSURANCE 23.104.760

2 IMPLICIT COST

FIXED EUQIPMENT DEPRECIATION

56,000,000

3 FIXED COST

FIXED ASSETS DEPRECIATION PAY PER MONTH

56,000,000

LAND LEASE PAY IN PER YEARS 5,349,000,000

INTEREST EXPENSE 5,205,412,053

4 VARIABLE COST

UTILITIES PAY PER MONTH

377,245

DELIVERY COST PAY PER MONTH 3,363,835

MATERIAL COST
1.671.206.964

OFFICE EQUIPMENT PAY PER MONTH

1.384.694

5 AVERAGE COST

PROVISION COST / PROMOTIONS ON AVERAGE N/A

SHORT RUN DISTRIBUTION COST FOR OFFICE ON AVERAGE N/A

EQUIPMENT

PROVISION COST FOR ON AVERAGE N/A

UNEMPLOYMENTS

LONG RUN DISTRIBUTION COST FOR COSTLY N/A

MACHINES

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 9 MONTHS IN 2019
SECTION NO. DETAILS UNIT TỶ LỆ %
QUANTITY PRICE MONEY
I DIRECT MATERIAL COSTS (1-2) 37.117,11 1.671.206.964 67%
1 USES 46.511 1.220.913.915
Plastic beads T3034 Kg 38.027 26.218 996.994.053
Plastic TC PP có màng Kg 6.805 27.312 185.856.109
Plastic TC Kg - -
Yellow Plastic bead YL207 Kg - -
Gold color plastic beads L23703 Kg - -
Yellow Plastic bead H0833 Kg 14 60.000 852.000
Machining aid beads taical EFPE TPB75 Kg 876 17.500 15.336.309
Color bead white EMPE 1070-S01 Kg 222 61.275 13.606.673
Bead TGC taical EFPP 1001-4 Kg 475 7.400 3.515.019
Taical beads EPP 103EX Kg - -
color bead L25357 91 51.965 4.753.752
Plastic beads PP6102
OTHER COSTS 969.484.583
BOPP film VNĐ 445.819.422
Carton box + pads VNĐ 122.003.213
PE bag VNĐ -
Secondary NVP VNĐ 7.139.290
Unfinished previous period VNĐ 394.522.658
2 COLLECTING WASTE 9.394 519.191.534
Plastic waste kg
Plastic mix with OH kg
Oh waste kg
Oh waste with BOPP film kg 8.006 25.000 200.150.000
Burnt or dirty OH waste kg 1.388 3.000 4.162.800
Testing cost kg
UNFINISHED PRODUCTS AT THE END OF THE
3 PERIOD kg 314.878.734
II DIRECT LABOR COSTS 281.206.512 11%
1 Salary VNĐ 245.913.889
2 Pre-insurance VNĐ 23.104.760
3 Unions costs VNĐ 2.149.280
4 13 months salary deduction expense VNĐ 10.038.583
III GENERAL PRODUCTION COSTS 509.519.694 21%
1 Electricity VNĐ 75.732.192
Office equipment VNĐ 16.616.332
2 Staff VNĐ 88.274.892
Materials VNĐ -
3 Depreciation VNĐ 143.822.505
Amortization VNĐ 64.870.541
4 Direct equipment expense TK 153 VNĐ 41.701.452
5 Equipment allocation expense TK 153 VNĐ 38.135.750
6 Equipment allocation expense Tk 242 VNĐ -
7 Other expense VNĐ 40.366.031
IV Total Cost (I+II+III) VNĐ 2.461.933.170
V Freight inwards VNĐ 124.925.000

VI Esstimated quantity in 2019 Millions 1.239

VI Quantity produced in October 2019 Millions 1.023
VII Revenue before tax VNĐ 49,560,000,000
VIII Tax VNĐ 9,912,000,000
IX Revenue after tax VNĐ 39,648,000,000

Figure 1. Straw’s Produon Cost and Revenue in 2019

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IV. Conclusion and recommendation
1. Conclusion:
Base on the data we have collected, it is clear to see that the company is making
some profit, furthermore, the company show the sign of efficiency when the
company almost reach the estimated plan.
2. Recommendation:
It is advisable for the company to reduce the waste material as much as possible,
moreover, as people starting to raise awareness of plastic product such as straw,
plastic bags, etc. The company should be focus on making and developing non-
plastic straw products. There are two solution for this case:

+ First of all, the company should reduce the percentage of plastic in their products
as much as possible. For example, they could reduce the plastic down to 60% and
the rest could be replaced by Tapioca in 40%. Furthermore, the price of Tapioca in
Viet Nam is very cheap which could be a huge advantage for the company to try and
develop new products. Eventhough the price might increase up to 500đ compare to
bamboo straw is 10.000đ or paper straw is 120đ , people likely willing to accept the
price as using green products has become a big trend in the world.

+ Secondly, the company should cooperate with the Deanast Company which
featuring a new non-plastic material consist of sugar cane and grape’s oil, not only
potential but it could also creating an adventage for the company to make a break
through in non-plastic products.

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Reference:
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Available at https://businessjargons.com/short-run-cost.html
[Accessed 1/11/2019]
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Available at https://businessjargons.com/explicit-cost.html
[Accessed 2/11/2019]
Investopedia, 2019, Implicit Cost. [Online]
Available at https://www.investopedia.com/terms/i/implicitcost.asp
[Accessed 2/11/2019]
Wikipedia, 2019, Fixed cost. [Online]
Available at https://en.wikipedia.org/wiki/Fixed_cost
[Accessed 2/11/2019]
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[Accessed 2/11/2019]
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Available at https://en.wikipedia.org/wiki/Total_cost
[Accessed 2/11/2019]
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monopoly/
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Available at: https://en.wikipedia.org/wiki/Break-even_(economics)
[ Acessed 1/11/2019 ]

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 V. Work assigments
Name of student Job
Nguyen Thi Que Huong 1. Introduction of choosing H’LAT company
2. Write down Preface
3. Analyzing the cost
Tran Thi Tram Anh 1. Features of “Cost in short run”
2. Features Cost definitions
3. Analyzing the cost
Nguyen Doan Phuong 1. Features Cost of long run
Thao 2. Features Profit maximization
3. Analyzing the cost
4. Edit Word and Powerpoint file
Chau Huynh Long 1. Features of breakeven point.
2. Analyzing the cost
3. Recommendation & Conclusion