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Automaker’s Inventory and Excess Capacity

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Read the following article from The Wall Street Journal (see attachment):
More Car Plants at Risk/ Capacity Glut Spurs GM, Chrysler to Plan Factory Closures

1. The article relates many plant closings, if the automakers close plants what is the affect on total costs? Fixed costs? Marginal Total Costs?

2. The article mentions a 'excess capacity', what economic concept have we studied in the past week that relates to 'excess capacity?'

3."At the end of January, the industry as a whole had 2.93 million light vehicles in inventory in the U.S. -- enough to last 116 days at current sales levels, according to Autodata Corp. That's up from 90 days at the end of December. Together, GM, Ford and Chrysler have 1.56 million vehicles on dealer lots, or 145 days of inventory, up from 99 just a month ago." (From the article)

4. How would you characterize INVENTORY as an economic variable? Is it supply? If the current inventory is almost 3 million light vehicles and that is expressed at 116 days of sales why is that a useful measure of inventory? Is inventory a stock or a flow, why?

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Solution Preview

Total costs include both fixed and variable cost. Fixed costs include overhead, which may decline if the lease if up on the facility. If the facility is already paid for, fixed costs may not decline significantly. The company could sell the facility, but this does not technically affect fixed costs. Variable costs are labor and power needed to keep the factory running. These would decline significantly when a plant closes. Therefore, when a plant closes, the total costs also decline.

Marginal cost is determined by the difference between the the cost of producing the last car and the cost of producing the next one. Because variable costs have ...

Solution Summary

How inventory and excess capacity affect automotive plants is determined.