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Fixed and Variable Costs Comparison

Production Manager at AutoEdge, Sam Busch, is new to the company. He asks to meet with you to discuss some questions he has.

"Thanks for meeting with me on such short notice," he says. "I'm still getting familiar with the situation here, and I could use your help."

"Certainly," you say. "And congratulations on your new position with AutoEdge."

"Thanks," he says. "I am preparing for a presentation to the board in 2 weeks. I've reviewed the most recent production reports, and I see that we are currently producing an engine part, for example, in South Korea for $110. This cost is much lower compared to the cost of producing the same part in the United States, which is $320 per unit. The disparity might be attributed to the cost of labor, unions, overhead, and operating costs."

"That makes sense," you say.

"If we return the manufacturing operations to the United States," he says, "what types of short-term and long-term variable and fixed costs should we consider? What costs should we expect if we stay in South Korea? What financial risks are the company and the stakeholders exposed to?"

"Those are all good questions," you say. "Can I give this some thought and get back to you?"

"Sure," he says. "I'll be working on my presentation next week. I'd like to get your opinion about these questions and the supporting research so I can include it."

"That works for me," you say. "Glad I can help."

I am so lost in this class I need to understand: "If we return the manufacturing operations to the United States," he says, "what types of short-term and long-term variable and fixed costs should we consider? What costs should we expect if we stay in South Korea? What financial risks are the company and the stakeholders exposed to?"

Let me know if this is something you are familiar with and can help me understand.

Solution Preview

"The disparity might be attributed to the cost of labor, unions, overhead, and operating costs."
"That makes sense," you say.

"If we return the manufacturing operations to the United States," he says, "what types of short-term and long-term variable and fixed costs should we consider? What costs should we expect if we stay in South Korea? What financial risks are the company and the stakeholders exposed to?"

In order to help the new Production Manager, Mr. Sam Busch with his questions about the short and long term impacts of returning manufacturing operations to the United States, we first have to clearly define what the difference is between "fixed costs" and "variable costs" and then identify what the predominant costs are that will impact our manufacturing company.

First, the difference in fixed and variable costs is exactly as it sounds. "Fixed means the costs are "set in stone" for a specific time frame and are spread out and budgeted exactly for the duration of the period being analyzed. For example, if we bought a new manufacturing facility and it cost $1 million dollars, that cost would be a fixed cost and we would spread it out over time. Perhaps it would show up in the budget over the next 5 years at $16,667.00 a month without changing. So, it's very easy to account for this in a business budget. Some of the key examples of fixed costs are things such as; facilities, equipment, vehicles, tools, machinery, and so forth. Often these are called "one time purchases" and they can be depreciated via GAAP rules by the IRS to save on the tax burden associated with these purchases (Florentino, 2014).

Variable costs are a different animal to deal with all together and this is where many manufacturing companies in the United States have a hard time competing with overseas ...

Solution Summary

This solution focuses on describing the differences between short and long term fixed and variable costs in manufacturing. Specifically, it's modeled on a case study about a manufacturing company, AutoEdge, who's considering a move from South Korea back to the United States. The solution is over 1,000 words in APA and answers the following scenario.

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