Eco Case 08 The Production Function 
Economics, Case No. 8
THE PRODUCTION FUNCTION AT TOYOTA
Throughout most of the 20th century, business in the United States, especially in manufacturing, was dominated by the paradigms of mass production and scientific management. The focus was primarily on finding ways to produce at lower unit costs without much overt concern about quality and consumer satisfaction. Now, a new view of the productive enterprise has emerged. The new view focuses more on quality and customer satisfaction as the driving forces to long term business success. Terms such as TQM and
KAIZEN have become the buzzwords of the business community. Although the focus has shifted, the result is the same. A business that focuses on continuous improvements is likely to find reduction in unit costs along the way.
TOYOTA has found ways to reduce variations from the established quality standards, so that less rework and scrap page result. As a result, the throughput of completed and saleable products per shift is improved and the average unit cost is reduced.
TOYOTA has also found ways to increase the flexibility of production, between different types of products. At TOYOTA, for example, the former goal of being able to make a die change in a minute has been changed to a few seconds. As a result, completely different (much shorter) production runs that enjoy the economies of mass production have become possible.
The short run average cost functions (based on newly evolved Production Functions) have been regularly updated and used to ensure unit cost minimization.
(For the sake of this case, the actual figures are deliberately altered. All figures are in $ Thousands.)
The Variable Cost Function is represented by the equation:
VC = 18Q – 2.7Q2 +0.15Q3
Where Q is the quantity of Cars produced in a batch.
The Fixed Costs relevant to the model are $ 30,000 /-, Thus FC = 30 (since all units are in thousands)
Therefore, TC = FC + VC = 30 + 18Q -2.7Q2 +0.15Q3
Table 1: Unit Costs as a Function of the
THE PRODUCTION FUNCTION AT TOYOTA
Throughout most of the 20th century, business in the United States, especially in manufacturing, was dominated by the paradigms of mass production and scientific management. The focus was primarily on finding ways to produce at lower unit costs without much overt concern about quality and consumer satisfaction. Now, a new view of the productive enterprise has emerged. The new view focuses more on quality and customer satisfaction as the driving forces to long term business success. Terms such as TQM and
KAIZEN have become the buzzwords of the business community. Although the focus has shifted, the result is the same. A business that focuses on continuous improvements is likely to find reduction in unit costs along the way.
TOYOTA has found ways to reduce variations from the established quality standards, so that less rework and scrap page result. As a result, the throughput of completed and saleable products per shift is improved and the average unit cost is reduced.
TOYOTA has also found ways to increase the flexibility of production, between different types of products. At TOYOTA, for example, the former goal of being able to make a die change in a minute has been changed to a few seconds. As a result, completely different (much shorter) production runs that enjoy the economies of mass production have become possible.
The short run average cost functions (based on newly evolved Production Functions) have been regularly updated and used to ensure unit cost minimization.
(For the sake of this case, the actual figures are deliberately altered. All figures are in $ Thousands.)
The Variable Cost Function is represented by the equation:
VC = 18Q – 2.7Q2 +0.15Q3
Where Q is the quantity of Cars produced in a batch.
The Fixed Costs relevant to the model are $ 30,000 /-, Thus FC = 30 (since all units are in thousands)
Therefore, TC = FC + VC = 30 + 18Q -2.7Q2 +0.15Q3
Table 1: Unit Costs as a Function of the