A

MINI PROJECT
ON
“How to estimate operating cost for long run”
Submitted to Dr. A.P.J. Abdul Kalam Technical University, Lucknow in the
partial fulfillment of the requirement for the award of the degree of
Master of Business Administration

Session: - 2023 – 2025

UNDER THE GUIDANCE OF SUBMITTED BY
Dr. ………………………….. Mr./Ms. CHHAYA
(Faculty of MBA Department) Roll No: -

S.D. COLLEGE OF MANAGEMENT STUDIES, MUZAFFARNAGAR

(Affiliated to Dr. A.P.J.Abdul Kalam Technical University, Lucknow)
 CONTENTS

Page No.
 PREFACE
 ACKNOWLEDGEMENT
 DECLARATION
1. Introduction of Topic

2. Objective of Study

3. Scope of Study

4. Importance of Study

5. Research Methodology

6. Theoretical Framework / Case Study

7. Limitations

8. Finding

9. Conclusion

10. Bibliography
 PREFACE

It gives me immense pleasure to present this project report on How to estimate opportunity
cost for long run. The report is a result of my research work carried out during the first semester
of my MBA program. The objective of this project was to estimate the opportunity cost for long
run. The results obtained from this project are presented in the following chapters. I would like to
express my sincere gratitude Mrs. Astha Singhal Mam.

Chhaya
 ACKNOWLEDGEMENT

I would like to express my sincere gratitude to everyone who has helped me in the completion of
this project. I am thankful to my project guide Mrs. Astha Singhal Mam for her guidance and
support throughout the project. I am grateful to Dr APJ Abdul Kalam Technical University for
providing me with the opportunity to undertake this project. Finally, I would like to thank my
family and friends for their constant encouragement and support.

Chhaya
 DECLARATION

I hereby declare that the project report titled How to estimate opportunity cost for long run
submitted by me to Dr APJ Abdul Kalam Technical University in partial fulfilment of the
requirements for the award of the degree of Master of Business Administration is my original
work. The report has not been copied from any other source and has not been submitted for the
award of any other degree or diploma. All sources of information used in the report have been
duly acknowledged. I also declare that the work presented in this report has not been plagiarized
from any other source. I understand that any act of plagiarism will result in the rejection of the
report and may lead to further disciplinary action.

Chhaya

c
 1

INTRODUCTION OF THE TOPIC

Operating cost is the amount of money that a business spends on its normal day-to-day activities,
such as rent, salaries, materials, and utilities. Operating cost is an important indicator of a
business’s efficiency and profitability, as it reflects how well the business manages its resources
and generates revenue. Operating cost can be divided into two categories: fixed and variable.
Fixed costs are those that do not change with the level of output, such as rent and depreciation.
Variable costs are those that change with the level of output, such as raw materials and labour.

The purpose of this project is to estimate the operating cost for long run, which is the time period
in which all factors of production can be varied. In the long run, a business can adjust its scale of
operation, such as expanding or reducing its plant size, to achieve the optimal level of output and
minimize its average cost.
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OBJECTIVE OF STUDY

The objective of study of my project report on how to estimate operating cost for long run is to:

 Analyse the behaviour of costs in long run, when all factors of production can be varied.
 Comprehend the different sources of economies of scale, which reduce the average cost
as output increases
 Explain various functional forms of production and costs, such as linear, quadratic, cubic,
and exponential
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SCOPE OF STUDY

The scope of study for this project is to apply the concept of opportunity cost to various
scenarios of long-run decision making. Opportunity cost is the value of the next best alternative
that is forgone as a result of choosing a particular option.

To estimate opportunity cost, we need to compare the expected returns of different options and
calculate the difference between the best option and the chosen option.

The project will cover the following aspects:

 Review the theoretical framework and the literature on opportunity cost, its definition,
calculation formula, and examples.
 Explain the importance of opportunity cost for long-run,
 Demonstrate how to estimate opportunity cost for long
 Apply the estimation methods to real-world cases of long-run decision making.
 Discuss the limitations of the opportunity cost for long run.
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IMPORTANCE OF STUDY

The importance of study for this project is to understand how opportunity cost affects long-run
decision making and resource allocation.

 Opportunity cost helps to compare the costs and benefits of different production
technologies and choose the most efficient one. For example, a firm can use different
combinations of labor and capital to produce the same output, but some methods may be
cheaper or faster than others.
 Opportunity cost helps to allocate scarce resources optimally and avoid wasteful
spending. For example, a government can use its budget to fund different public projects,
but it has to consider the opportunity cost of each project and prioritize the ones that have
the highest social benefit.
 Opportunity cost helps to assess the profitability and sustainability of a business
venture. For example, an entrepreneur can invest in a new product or service, but he or
she has to consider the opportunity cost of the capital, time, and effort involved and
compare it with the expected returns.
 Opportunity cost helps to make rational and informed decisions that maximize the utility
or satisfaction of the decision-maker. For example, a consumer can buy a certain good or
service, but he or she has to consider the opportunity cost of the money spent and the
foregone consumption of other goods or services.
 Opportunity cost helps to understand the trade-offs and consequences of economic
policies and actions. For example, a country can pursue a certain economic goal, such as
growth or stability, but it has to consider the opportunity cost of the resources used and
the effects on other economic variables, such as inflation or unemployment.

RESEARCH METHODOLOGY
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The research methodology for this project consists of the following steps:

1. Review the theoretical framework and the literature on opportunity cost, its definition,
calculation formula, and examples.

2. Collect the data required to estimate the operating cost, like cost of all the sold goods and
all the other operating expenses that incurred by a business like rent, salary, wages,
utilities bills and maintenance during a particular year.

3. Apply the common mathematical method for assessing the opportunity cost, which is:

Opportunity Cost = COGS + Other Operating Expenses

4. Evaluate the opportunity cost estimates by adding the cost of goods sold and other
operating expenses.

5. Discuss the limitations and findings of the operating cost.

CASE STUDY
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Introduction:
The purpose of this case study is to provide insights into how to estimate operating costs for the
long run using a practical example from XYZ Manufacturing Company. The study will highlight
the various cost components involved in estimating operating costs and the methodologies
employed by the company to ensure accurate forecasting.

Company Background:
XYZ Manufacturing Company is a leading global manufacturer of automotive components. With
a diverse product range and a significant market share, the company operates multiple
manufacturing facilities worldwide. The case study focuses on estimating operating costs for one
of the company's manufacturing facilities.

Problem: Over the past year, XYZ Manufacturing company sold the goods of Rs, 50,000,000
and made the other operating expenses include labour, raw material, utilities and maintenance of
Rs. 30,000,000. Calculate the Operating Cost for the company.
Solution: To estimate operating costs for the long run, we use formula:

Operating Cost = COGS+ Other operating expenses

1. Cost of Goods Sold (COGS): ₹50,000,000

2. Other Operating Expenses: ₹30,000,000

Using the formula for calculating operating costs:

Operating Cost = ₹50,000,000 + ₹30,000,000 = ₹80,000,000

Therefore, XYZ Manufacturing Company’s operating cost for the year was approximately ₹80
Crore.

LIMITATIONS
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Limitations of opportunity cost:

 It is time-consuming to calculate the opportunity cost of every decision, as it requires

evaluating various alternatives and their outcomes.
 It is difficult to compare the value of different alternatives, especially when they have
different units, dimensions, or qualities.
 It is subjective and depends on the preferences, goals, and constraints of the decision
maker and the context of the decision.
 It is based on assumptions that may not hold true in reality, such as perfect competition,
free mobility of factors, homogeneity of factors, and full employment of resources.
 It is not applicable to specific factors that have only one use, or to situations where there
are no alternatives available.

FINDINGS

The findings of my project report are:

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 Opportunity cost is the forgone benefit that would have been derived from an option
other than the one that was chosen.
 To calculate opportunity cost, the formula is: Opportunity Cost = Return of Next Best
Alternative not chosen – Return of the option choose.
 Opportunity cost analysis can help individuals and organizations make better decisions
by considering the costs and benefits of every option available, as well as the potential
risks and uncertainties.
 In the long run, a firm is free to adjust all of its inputs and new firms can enter or exit the
market. The model of perfect competition predicts that, at a long-run equilibrium,
production takes place at the lowest possible cost per unit and that all economic profits
and losses are eliminated.

CONCLUSION
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In conclusion, opportunity cost is a useful concept to help decision-makers evaluate the costs and benefits

of different alternatives and make the best use of limited resources. It also shows the trade-offs involved

in every choice and the potential outcomes that are forgone. Some of the applications of opportunity cost

are in production, investing, and personal finance. Opportunity cost is a fundamental concept in

economics that helps us understand the trade-offs involved in every decision we make. It measures the

value of the next best alternative that we give up when we choose a certain option. By calculating the

opportunity cost, we can compare the costs and benefits of different choices and make the most efficient

use of our scarce resources. Opportunity cost also reflects the potential outcomes that we miss out on

because of our choices. Therefore, opportunity cost is a useful tool for decision-making in both personal

and professional contexts.

BIBLIOGRAPHY
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1. Managerial Economics by DN Dwivedi.

2. aspireapp.com