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The high cost case study solution (Code: c54)

The high cost case study solution
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The high cost

The high cost of television receivers is mainly due to scale of production and cost of the input raw
materials. The degree of automation and efficiency and technology are additional factors which
determine the cost of components. In India, the input materials are subject to very high customers
duties. Because of the split up of licences presumably with a view to avoiding a monopoly
situation, the scale of operation are far lower in India than in countries overseas. Small volume of
production has engendered the use of manual techniques of production which pushes up costs.
Semester 1 Examination paper
IIBM Institute of Business Management
Though wages may be comparatively lower in India than in Western countries, the industry in India is
plagued with lower productivity, labour unrest and power shortage. These factors push up the cost
substantially. The electronic components industry, in general, and the picture tube industry, in
particular, will need protection by way of import duties. The protection being given to the electronic
components industry is in no way different from the treatment according to other engineering
industry. It would be impossible to grow in India an indigenous electronic components industry
without protection unless all inputs are available at international prices and unless production is
geared to international levels of operation. As electronic components are the building blocks of the
electronics industry, such growth should be nurtured. A 51-cm TV receiver is available in the
Western markets at about US $90. The cost of components in a set would be of the order of US $60,
including the cost of the picture tube. Balance of US $30 covers assembly, testing, marketing,
financing and profit. In India, the build-up of the costs is as follows: Price of components including
the picture tube (Rs. 1,285 + Rs. 80 towards freight and mortality) = Rs. 1,365,00; cost of
manufacture and marketing including profit Rs. 235.00; Dealer’s commission is Rs. 200; Excise on
Rs. 1,600 is Rs. 84; Sales Tax (10 percent ) is Rs. 184.40; total Rs. 2,072.40. This represents the
cheaper model available today. In Western countries the cost of assembly, testing, financing and
profit. Including dealer’s commission, amount to only US $30 or approximately Rs. 250. The cost of
similar operation in India escalates to Rs. 435 in spite of the so-called cheap labour. A cost
comparison of components available to the television industry in India as against what television
manufacturers in Western countries are able to obtain is given in the Table below:
Item Western Indian
Prices prices
Rs. Rs.
Picture Tube $18.00 (Rs. 162.00) 405.00 243.00
Tuner $ 4.00 (Rs. 36.00) 125.00 89.00
Cabinet $ 5.00 (Rs. 45.00) 125.00 80.00
Deflection Components $ 3.50 (Rs.31.50) 100.00 68.50
Semi-conductors $ 6.00 (Rs. 54.00) 250.00 195600
Passive components $ 20.00 (Rs. 180.00) 180.00 -
Other components $ 8.00 (Rs. 72.00) 100.00 28.00
Total $ 64.00 (Rs. 580.50) 1,285.00 704.50
Notes: 1. Assumed US $ 1 =Rs.9.
2. Accessories like antenna and installation are extra and cost nearly Rs. 200 in India.
Semester 1 Examination paper
IIBM Institute of Business Management
It will be seen that apart from the picture tube the other components are also expensive.
A mass produced plastic cabinet will be available in western countries to the TV receivers industry at
about US $ 5 whereas a wooden cabinet produced in India costs as much as Rs. 125. There is a
feeling that as the wooden cabinets are made by the small-scale industry, it would be advisable to
stick to this approach. Cost reduction would be difficult with such approaches. Again, in the case of
tuners and deflection components, the Indian price is nearly 3 to 4 times the price of similar
components available overseas. Semi-conductors are also expensive. Therefore, it is stated that it
would not be appropriate to single out the picture tube as the main culprit leading to the high cost of
components for a television set. It would be necessary to look at the cost structure of the electronic
components industry in general for the answer. It should be possible to product a moulded cabinet in
India provided all the manufacturers join together as a consortium set up the necessary facilities or an
MNC who has considerable experience in the field is asked to produce the cabinets for supply to the
rest of the industry. If we stick to the wooden cabinet, it may protect the small-scale industry at the
expense of the consumers. Unless the scales of operations for the other components increase and
unless input raw materials are made available at international prices, it would be difficult for the
electronic components industry to bring down the price to international level.
One may argue why a high cost electronic components industry should be supported in India, and
take the view that it may be advisable to import the components. The suggestion may be valid when
we are flush with foreign exchange. The situation was quite different a few years back. In any case,
for the healthy growth of the electronics industry it is essential that the building bricks-electronic
components – are made in the country. Industry’s attempt should be towards a policy which enables
components to be made economically and it is essential that all steps are taken to look into the
difficulties of the electronic components industry and remedy the same. The glass shell for the picture
tube is being imported and the current c.i.f. price is about Rs. 80. An import duty of 75 percent pushes
up the cost to Rs. 140. Taking damage in transit into account, the price per glass shell comes to Rs.
150. There is a freight element of Rs. 23 in the c.i.f. cost of Rs. 80. Duty is payable on freight and the
element of freight cost plus duty amounts to Rs. 40 out of the total cost of Rs. 150.
1. How long can an industry sustain on protection?
2. What is the impact of incidental services like assembly, testing, marketing, etc. on the total cost?
3. Would you agree to the suggestion for a complete changeover to wooden cabinet?
4. Would it be desirable to import the components rather than make them in India?



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