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    Ananlyzing various costs of an unprofitable firm

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    You've been hired by an unprofitable firm to determine whether it should shut down its unprofitable operation.
    The firm currently uses 70,000 workers to produce 300,000 units of output per day. The daily wage (per worker) is $100, and the price of the firm's output is $30. The cost of other variable inputs is $500,000 per day. Although you don't know the firm's fixed cost, you know that it is high enough that the firm's total costs exceed its total revenue.
    Provide a 1-2 page report to management of the firm as to whether or not it should continue to operate at a loss? Be sure to show your work to support the decision you outlined in your report.

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    Solution Preview


    Every firm tends to maximize its profits from its operations. In case firm is making loss, it will try to minimize its losses.

    Let us analyze firm's various costs in the given case,

    Number of workers employed=70,000
    Labor costs=Number of workers employed*wage rate=70000*100=$7,000,000
    Other Daily variable costs=$500,000
    Total Daily Variable Costs=$7000000+$500000=$7,500,000
    Total Daily output=300,000 units
    Average Variable ...

    Solution Summary

    Solution describes the methodology to determine whether an unprofitable firm should continue to operate or it should shut down its operations.