The manager of Beau Apparel, Inc. A clothing manufacturer that produces moderately priced men’s and Women’s garments, is facing a challenge as how to take a output decision for the next season of sales. Beau Apparel is the only one of many firms that produces a fairly homogeneous product, and none of the firms in this moderate –price shirt market engages in any significant advertising.
In the mid-December 2013, the manager of Beau Apparel was preparing the firm’s production plan for the first quarter of 2014. The manager wanted to obtain a forecast of the wholesale price of shirts for the first quarter of 2014. This price forecast would subsequently be used in making the production decision for Beau Apparel. The manager requests price forecasts form Beau Apparel’s Marketing/ Forecasting Division. The market researchers, using forecasting techniques provided the manager with three wholesale price forecasts based on three different assumptions about economic conditions in the first quarter of 2014: High: AED 20, Medium AED 15, Low AED 10. Given the three different situations the Manager of Beau Apparel is expected to estimate average variable cost and marginal cost given the value of a, b and c calculated based on the time series data over the six year time period 2008 to 2013, during which Beau Apparel had the same size plant, the following variable cost function can be developed a= 20, b= - 0.003, c = 0.00000025. Suppose the fixed cost is AED 30000
All the estimated coefficients had the required signs and were statistically significant. The estimated average cost function provided the information needed for making the decision to produce or shut down. It is also important to estimate the marginal cost function, the unknown parameters ( coefficients for marginal cost function can also be taken as above.
After obtaining forecasts of price and estimates of the average variable costs and marginal cost curves., the manager can answer the two production questions: 1 should the firm produce or shut down? And 2 if production is warranted, how much should the firm produce? Also compute the profit or loss situation for the firm. Show how the manager takes the decision.
To solve this case study six steps have to be followed: