Page Report Details The Firm Uses 50,000 Workers To P
2 4 Page Reportdetailsthe Firm Currently Uses 50000 Workers To Pro
The firm currently employs 50,000 workers to produce 200,000 units of output daily. Each worker earns a daily wage of $80, and the output is sold at a price of $25 per unit. The variable costs, excluding wages, amount to $400,000 daily. Fixed costs are $1,000,000, which are constant regardless of production levels. To analyze the firm's financial performance, we calculate four key metrics: Total Variable Cost, Average Variable Cost, Total Cost, and Worker Productivity for two scenarios—initial fixed costs of $1,000,000 and increased fixed costs of $3,000,000. Using these, we then determine whether the firm should continue operation or shut down under each scenario and how many workers need to be laid off to break even if operating at a loss. Finally, the report discusses changes in worker productivity and assesses whether the firm should shut down or optimize labor to sustain profitability.
Calculations for Case 1: Fixed Cost = $1,000,000
Total Variable Cost
Total Variable Cost = (Number of Workers * Worker’s Daily Wage) + Other Variable Costs
Total Variable Cost = (50,000 * $80) + $400,000 = $4,000,000 + $400,000 = $4,400,000
Average Variable Cost
= Total Variable Cost / Units of Output per Day
Average Variable Cost = $4,400,000 / 200,000 units = $22 per unit
Total Cost
Total Cost = Total Variable Cost + Total Fixed Cost
Total Cost = $4,400,000 + $1,000,000 = $5,400,000
Average Total Cost
= Total Cost / Units of Output per Day
Average Total Cost = $5,400,000 / 200,000 units = $27 per unit
Worker Productivity
= Units of Output / Number of Workers
Worker Productivity = 200,000 / 50,000 = 4 units per worker per day
Calculations for Case 2: Fixed Cost = $3,000,000
Total Variable Cost
Same as above: $4,400,000
Average Variable Cost
= $22 per unit
Total Cost
Total Cost = $4,400,000 + $3,000,000 = $7,400,000
Average Total Cost
= $7,400,000 / 200,000 units = $37 per unit
Worker Productivity
= 4 units per worker per day
Profit or Loss Calculations
Scenario 1: Fixed Cost = $1,000,000
Revenue = Price per unit * Units of output
Revenue = $25 * 200,000 = $5,000,000
Profit/Loss = Revenue - Total Cost
Profit/Loss = $5,000,000 - $5,400,000 = -$400,000
Since the firm incurs a loss, and the price per unit ($25) exceeds the average variable cost ($22), the firm should continue operating in the short run, as it can cover variable costs and contribute towards fixed costs. Immediate shutdown is not advisable since total revenue exceeds variable costs.
Scenario 2: Fixed Cost = $3,000,000
Profit/Loss = $5,000,000 - $7,400,000 = -$2,400,000
Again, the price exceeds average variable cost ($22), so the firm should operate in the short run despite the loss. However, the larger fixed costs increase total losses significantly, raising questions about long-term viability.
Break-Even Analysis and Worker Layoffs
Number of Workers to Break Even
To determine the number of workers needed to break even, the firm must cover total costs with revenue, specifically ensuring that average total cost equals the selling price.
Calculating the Break-Even Number of Workers for Scenario 1
Set Total Cost equal to Revenue:
Total Cost = Revenue ⇒ (Variable Cost + Fixed Cost) = Price * Output
Variable Cost = (Number of Workers * $80) + $400,000
So, the total cost is:
(80 W) + 400,000 + Fixed Cost = 25 200,000
With Fixed Cost = $1,000,000:
(80 * W) + 400,000 + 1,000,000 = 5,000,000
(80 * W) = 5,000,000 - 1,400,000 = 3,600,000
W = 3,600,000 / 80 = 45,000 workers
Since the firm currently employs 50,000 workers, it is above the break-even point; hence, layoffs of 5,000 workers would yield a break-even scenario.
Change in Worker Productivity
Originally, productivity was 4 units per worker. After layoffs to 45,000 workers, productivity remains high at approximately 4.44 units per worker (200,000 / 45,000). The increase in productivity may reflect more efficient labor utilization, but further analysis is required to assess whether workers can sustain higher productivity levels.
Implications and Recommendations
Given the calculations, operating at a loss does not warrant immediate shutdown under both fixed cost scenarios because the firm covers variable costs and contributes towards fixed costs in the short run. However, the increasing fixed costs significantly diminish profitability, raising strategic concerns about long-term sustainability. The firm should consider optimizing its workforce to break even, which, in this case, involves laying off approximately 5,000 workers when fixed costs are at $1,000,000. Notably, such layoffs would increase worker productivity, but the question remains whether this productivity is feasible to maintain without sacrificing worker well-being and efficiency.
Furthermore, the firm must evaluate whether investments in productivity enhancements, such as improved training or technology, could make operating at current or reduced workforce levels profitable. If worker efficiency cannot be increased to match or exceed the average variable cost, or if fixed costs continue to rise, the firm should consider long-term restructuring, including possible shutdowns or diversification strategies to reduce fixed costs and improve competitiveness.
Ultimately, the decision to operate or shut down hinges on whether the firm can feasibly increase productivity or reduce costs while maintaining revenue streams. For short-term survival, the firm should continue operations with optimized workforce levels, but long-term strategies must address fixed cost reduction and productivity improvements.
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