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Operation Decisions: When Costs Exceed Revenue

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Assume you have been hired as a managing consultant by a company to offer some advice that will help it make a decision as to whether it should shut down completely or continue its operations. It currently uses 100 workers to produce 6,000 units of output per month (working 20 days / month). The daily wage (per worker) is $70, and the price of the firm's output is $32. The cost of other variable inputs is $2,000 per day. You are told that the firm's fixed cost is "high enough" so that the firm's total costs exceed its total revenue. The marginal cost of the last unit is $30.

Describe the details of this fictitious business.

Assess the current environmental scan factors. Determine the factors that will have the greatest impact on plant operations and management's decision to continue or discontinue operations.

Evaluate the financial performance of the company using the information provided in the scenario. Consider all the key drivers of performance, such as company profit or loss for both the short term and long term. Be sure to show the calculations that helped you reach your conclusions.

Recommend how the company can improve its profitability. Then, develop a brief plan to implement the recommendations.

Assess the circumstances in which the company should discontinue operations. Provide a rationale with your response.

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Solution Summary

Recommendations for improving profitability and plan to implement the recommendations for a fictitious business.

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The fictitious business is a garment manufacturing firm involved in production of shirts. The company is located in United States and sells its products in United States as well as other countries as well. The company is facing tough times due to recessionary times in USA and other markets of the world and is trying to improve its sales and reduce its operational costs to stay afloat.

The main factors that would have the greatest impact on plant operations and management's decisions to continue or discontinue operations is the ability of the company to meet its variable or operating costs, increase or decrease in raw material and salaries of the workers and increase or decrease in the sales volume. The company would be able to sustain its operations if costs are under control and the company is able to generte sufficient sales to keep the plant running.

Let us calculate some numbers:

Total Daily Cost of the firm: 100*70 + ...

Solution provided by:
Sandeep Bardia, MBA
Education
  • BCom, SGTB Khalsa College, University of Delhi
  • MBA, Rochester Institute of Technology
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