You've been hired by an unprofitable firm to determine whether it should shut down its unprofitable operation.
The firm currently uses 70 workers to produce 300 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 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. The $30 price is the price per unit. Finally, when the assignment says, "300 units of output per day," that means 300 units are sold as well. The 300 units represent the quantity for the day.
Help the management of the firm as to whether or not it should continue to operate at a loss?
The decision rule for a loss making firm in the short term is:
If the current revenues are able to cover all the variable costs, then the firm should continue in business.
This reason is that since the fixed costs are committed and cannot be avoided. So any contribution which is positive will reduce the total losses for the ...
This problem discusses how to take decisions about continuing in business or not for a loss making firm. Explained in an easy to understand way along with calculations. All completed in 229 words.