IIFT 2020 Question 1

Question 1

Maruti-Suzuki Company manufactures the Ciaz cars at its Manesar facility. The company employs labour and capital/machine as inputs in a 2 : 1 ratio of their quantities. The cost of one unit of labour (think it as wage per hour) is 500 rupees and the cost of one unit of capital (machine running cost per hour) is 1500 rupees. The total labour and capital cost for the monthly production is 5 crore rupees. Due to economic slowdown, the company has decided to reduce monthly production to half. Meanwhile, the labour cost has decreased by 20% and the capital cost has gone up by 20%. Find the total capital and labour cost the company would now incur for the monthly production.


Let the labour employed by the company be 2$$x$$ and the capital be $$x$$.

Thus, the total cost of running production for an hour = $$500\times2x+1500\times x=2500x$$

Total cost for running the production for a month = $$5$$ Crores = $$5\times 10^7$$

Total number of hours the production is done = $$x=\frac{5\times 10^7}{2500}=20000$$

Since the production is cut in half, the total hours = $$0.5\times = 20000=10000$$

Labour costs decreased by 20% and the capital cost increased by 20%.

Thus, the total cost per hour = $$500\times 2x\times 0.8 + 1500\times x\times 1.2=2600x$$

Since $$x=10000$$, the total cost = $$2600\times 100000=2.6$$Crores.

Hence, the answer is option B.

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