Firm performance - Research Paper Example

,000 - $3,000,000 - $4,400,000 = - $2,400,000 profit Now, assuming $3,000,000 fixed costs ($4,400,000 + $3,000,000) / 200,000 = $37 average total cost ($25 - $37) x 200,000 = $200,000 x (-12) = -$2,400,000 profit -2,400,000 / $80 worker wage = 30,000 workers laid off What should be done at the firm In the first scenario, the business breaks even, thus when fixed costs increase over $600,000, the business should shut down production or at least consider its capacity in terms of labor and the pricing of the finished output.

At $1,000,000, the business takes a profit loss of $400,000. Certainly at fixed costs increasing to $3,000,000 rather than the $1,000,000, the business is taking a profit loss of $2,400,000 which is substantial and would be difficult to offset without a significant cut in labor. In a practical firm environment with manufacturing, this is likely not feasible. In the third scenario when assuming fixed costs of $3,000,000, it would require laying off 30,000 workers, which is 60 percent of the entire labor force.

Below is the calculation for the new worker productivity with laid off workers when fixed costs total three million dollars. 200,000 units of output / 20,000 = 10 total worker productivity (a raise from 4 in scenario 1) There is really not enough data provided about the dynamics of worker responsibility or the tangibles of the production system to determine whether workers can increase their productivity without considering layoffs of 60 percent of the staff. However, as aforementioned, it is likely not feasible to reduce the workforce by such a significant volume without reducing output.

The total worker productivity calculation is a quantitative evaluation tool that does not take into consideration the operations environment or capacity. The most logical course of action would be to raise the selling price of the finished product from $25 to a more competitive market price that will allow for profit to be achieved. A small fraction of the workforce, say 10 percent, would provide for $400,000 cost savings and could likely be achieved with careful production planning, consolidation, or other operational changes.

By adding an additional $5 to the selling price, revenues would increase from $5,000,000 to $6,000,000, which would provide profit in the scenario where fixed costs are $600,000, when assuming $1,000,000 and much closer to break-even when the fixed costs are assumed at $3,000,000. Profit of $1,000,000 by reducing 10 percent of the workforce and enhancing pricing structure from $25 to $30 would add $1,400,000 to revenues and worker cost savings. With subsequent pricing increases, the losses can be offset without disrupting productivity or output volumes.

The business should consider market conditions and demand factors before establishing an appropriate price increase to ensure that business is not lost and the output product can still be competitive in the marketplace. When prices increase,