Purchase Solution

Production cost analysis

Not what you're looking for?

Ask Custom Question

The firm currently uses 50,000 workers to produce 200,000 units of output per day. The daily wage per worker is $80, and the price of the firm's output is $25. The cost of other variable inputs is $400,000 per day. Although you do not know the firm's fixed cost, you know that it is high enough that the firm's total costs exceed its total revenue.

Assume that total fixed cost equals $1,000,000. Calculate the values for the following four formulas:
? Total Variable Cost = (Number of Workers * Worker's Daily Wage) + Other Variable Costs
? Average Variable Cost = Total Variable Cost / Units of Output per Day
? Average Total Cost = (Total Variable Cost +Total Fixed Cost) / Units of Output per Day
? Worker Productivity = Units of Output per Day / Number of Workers
Then, assume that total fixed cost equals $3,000,000, and recalculate the values of the four variables listed above.
For both cases, calculate the firm's profit or loss.

For both sets of calculations, compare the firm's output price and the calculated average variable cost and average total cost. Should the firm shutdown immediately when the total fixed cost equals $1,000,000? Should the firm shut down immediately when the total fixed cost equals $3,000,000?

For one of the cases, if the firm can operate at a loss in the short-run, how many employees need to be laid off in order for the company to break even? To calculate the number of workers to be laid off, divide the loss for the two situations by the daily wage per worker. Given a lower number of employees now working at the company, what is the change in worker productivity? Is the change in worker too large, and the firm should shut down immediately? Or in your opinion, can the workers increase their productivity, assuming that the units of output per day remain fixed at 200,000 units, so that the firm operates at a break even state?

Provide a two to four page report to management of the firm that discusses what should be done.
Be sure to show your work to support the decision you outline in your report.

Attachments
Purchase this Solution
Solution Summary

Solution provides detailed analysis of costs in the given scenario. Solution contains about 525 words.

Solution Preview

Solution is attached as MS Word document also.

In business world, every firm tries to maximize its profit. It will try to minimize its losses in case it is not able to make profits.

In the given case, let us analyze firm's variable costs.
Number of workers employed=50000
Labor costs = Number of workers employed*wage rate= 50000*80=$4,000,000
Other variable costs=$400,000
Total Variable Costs=$4000000+$400000=$4400000
Total output=200000 units
Average Variable Cost=AVC=Total Variable Costs/Total output
=4400000/200000
=$22 per unit

Worker productivity= Units of Output per Day / Number of Workers=200000/50000=4
Price of firm's output=$25 per unit
Contribution margin per unit=Price-AVC=$25-$22=$3

Theory of firm suggests that shut down point comes at a point where price is just able to cover its ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
Recent Feedback
  • "Thank you"
  • "Really great step by step solution"
  • "I had tried another service before Brain Mass and they pale in comparison. This was perfect."
  • "Thanks Again! This is totally a great service!"
  • "Thank you so much for your help!"
Purchase this Solution
Free BrainMass Quizzes
Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

View More Free Quizzes
Related BrainMass Solutions

  • Flexible budget lends itself to cost-volume-profit analysis

    301756 Flexible budget lends itself to cost-volume-profit analysis Discuss how a flexible budget lends itself to cost-volume-profit analysis. Dear student, Discuss how a flexible budget lends itself to cost-volume-profit analysis.

  • Six Categories of Cost

    The total production cost, variable cost, and in some cases semi-variable costs are always taken into consideration is any incremental analysis.

  • Marginal cost - Comparing Marginal and Average Concepts

    Marginal analysis is important for business because it forces managers to think about idle capacity and the effects that it has on production costs. Marginal analysis is essential when considering pricing.

  • Break even point, CVP analysis

    214114 Cost volume Profit analysis, Break even point Cost, Volume, and Profit Questions 1. How should mixed costs be classified in CVP analysis? What approach is used to effect the appropriate classification? 2.

  • Production Economics: Cost Analysis

    509242 Production Economics and Cost Analysis "Cost Analysis" : Production Economics & Cost Analysis - Pick a good or service. Distinguish between the short-run and the long-run production and cost function for that good or service.

  • Cost Analysis : Solution set

    310254 Cost Analysis : Solution set Cost Analysis: Cost Analysis The fresh milk market in Honolulu is purely competitive. The typical production cost is defined by a a cubic cost schedule as shown below.

  • Decision Tree Analysis

    Typesetting and related costs to prepare for the production are $10,000. It will cost $2 per copy to produce the book. If additional copies are needed at a later time, the set-up cost will be$5,000 and the cost per copy will again be $2.

  • CVP Analysis - Graph and Mixed Costs

    analysis is based on the variable cost per unit/marginal cost per unit .It does not rely on the total cost per unit.

  • Break-even analysis: The following data pertain to last month's operations...

    51833 Break-even analysis: Example problem The following data pertain to last month's operations: Selling price $30 per unit Variable production cost $15 per unit Fixed production cost $80,000 Variable selling & admin. expense $3 per unit Fixed

  • Variance Analysis at Savannah Machine Tool Company

    The solution attached gives a detailed look at how to analyze production/manufacturing cost report and come out with variance analysis.

View More Related Solutions