Looking Closely at Cost and Competition
The automobile industry is a first growing sector with a bright future. The sector has consistently experienced an increase in worldwide sales reaching an unprecedented 88 million units in 2016 (Singh, Hirsh, Wilk & Parkin, 2017). The industry is oligopolistic in nature and coupled with high competition, intense differentiation, and vigorous marketing. One of the new entrants into this market is Tesla Motors. The company has differentiated itself from the rest by solely producing electric vehicles and car components. This unique strategy has not only enabled Tesla Motors to enter this industry but also to succeed.
The autos industry faces four major types of costs namely: fixed, variable, implicit, and opportunity costs. The first two have a direct effect on Tesla Motor’s accounting profit while the rest only affect the economic profit. Fixed costs are definite, permanent and cannot be avoided. They do not depend on the volume of units produced. Fixed costs include equipment, maintenance, building/space, overhead, and tooling costs. They are very vital to the sustainability of the business. Variable costs are the charges that vary depending on the volume of units produced by a company. Basically the higher the volume the higher the costs and the lower the volume the lower the costs. Variable costs attributable to Tesla Motors include the cost of raw materials, labor charges, and energy.
Implicit costs are intangible costs that are unaccounted for since they do not occur in cash transactions. They are the opportunity cost of resources in the possession of the company (“Explicit and implicit costs,” n.d.). A typical example for Tesla could be an expansion of the business into its land. Lastly, an opportunity cost is the cost foregone attributable to the next best alternative. Tesla Motors could have ventured into the biomedical equipment field for instance. The profit that the business would have earned in any of these different fields represents the opportunity cost.
Explicit and implicit costs and accounting and economic profit. (n.d.). Retrieved from https://www.khanacademy.org/economics-finance-domain/ap-microeconomics/ap-perfect-competition-topic/ap-economic-profit-tutorial/a/explicit-and-implicit-costs-and-accounting-and-economic-profit-cnx
Singh, A., Hirsh, E., Wilk, R., & Parkin, R. (2017, March 01). 2017 Automotive Trends. Retrieved from https://www.strategyand.pwc.com/trend/2017-automotive-industry-trends