THE FIRM - Research Paper Example

The firm’s management has requested a review on the viability of continuing their operations in the face of excessive variable as well as fixed costs and lack of profit. This report will provide recommendations on how to tackle the firm’s operational loss through two possible scenarios. In the first scenario, the firm is recommended to lay off about 10% of its workers and implement specific measures to improve worker productivity such as putting in place a feedback system and introducing a variable pay component.

In the second scenario, it is recommended to shut down operations immediately as the gap is too large and it is highly unlikely that the state of break even could be attained. The Firm: Recommendations for Continuation of Operations The latest management report stated that the firm currently uses 50,000 workers to produce 200,000 units of output per day. The daily wage per worker is $80, and the cost of other variable inputs is $400,000 per day. The said report did not provide a specific number for the firm’s fixed cost, however my interview with the firm’s CFO revealed that it is high enough so that the firm's total costs exceed its total revenue.

For the purpose of this report, two probable fixed cost amount will be used, namely $1,000,000 per day (Scenario A) and $3,000,000 per day (Scenario B). Based on the above numbers, several indicators could be calculated (Garrison, Noreen, and Brewer, 2009; Hansen, Mowen, and Guan, 2007) and are presented in the following table. Indicator Formula Value Total Variable Cost (Number of Workers * Worker's Daily Wage) + Other Variable Costs $4,400,000.00 Average Variable Cost Total Variable Cost / Units of Output per Day $22.

00 Average Total Cost (Total Variable Cost +Total Fixed Cost) / Units of Output per Day Scenario A: $27.00 Scenario B: $37.00 Worker Productivity Units of Output per Day / Number of Workers 4 unit per worker per day It is evidenced here that the firm is running an operational loss as in both scenarios the average total cost is higher than the output price of $25. The question put forward is then: Should the firm shut down immediately? If not, what needs to be done for the firm to break even? The purpose of this report is to provide recommendations that answer these questions.

Scenario A In this scenario, the firm’s revenue is $5,000,000 while its total cost is $5,400,000 per day. As “cost cutting meant downsizing,” (Hansen, Mowen, and Guan, 2007), to cover this loss of $400,000 per day, what the firm could do is downsize its workforce by about 10%, i.e. laying-off 5,000 workers. This would allow the firm to break even provided production output remains. It is necessary to exercise caution when implementing worker lay-offs as often this will trigger dissatisfaction among the remaining employees which leads to undesirable behaviours such as tardiness, absenteeism, and high turn-over (Johns, 2001).

Moreover, with less number of workers, the current worker productivity of 4 output units per worker per day needs to increase to 4.44 units per worker per day. In order to avoid the undesirable behaviours as well as increase productivity, it is recommended that the management apply initiatives to improve employee motivation. Two options are discussed here: 1. Feedback: A simple method of providing performance feedback has been shown to improve motivation (Wright, 1991). For example, if a worker knows that his output is 4 units per day whereas the average worker output is 4.

5, he would have an extra motivation to perform better. 2. Tying compensation to performance: Workers would be motivated to perform better if they know that it will lead to desirable reward (Vroom, cited in Donovan, 2001). This could be done for example through variable pay component which depends on productivity. Scenario B In this scenario, the firm’s revenue is $5,000,000 while its total cost is $7,400,000 per day. To cover this loss of $2,400,000 per day, the firm must lay off 60% of the existing workers (i.e. 30,000 workers) before it can reach break-even state.

At the same time, worker productivity has to be increased 250% from 4 to 10 units per worker per day. It is evident that the requirements for change in this scenario are too large to implement. Laying-off 60% of workers would cause issues with the worker union. Moreover, demanding that workers produce 2.5 times what they usually do would have consequences on various aspects such as quality control, occupational health and safety, and job satisfaction. The costs of rectifying these issues would defeat the original purpose of improving the firm’s profit-loss situations.

Conclusion In conclusion, given the two different scenarios, different sets of action need to be taken. In Scenario A, the firm should put off shutting down and instead should consider laying-off 10% of its workers and then continue to improve productivity to reach the state of break even. In Scenario B, shutting down immediately should be the first considered action plan as the cost of continuing operations will not allow the company to break even. Reference Donovan, J.J. (2001). Work motivation. In N. Anderson, D.S. Ones, & H.K. Sinangil (Eds), The Handbook of Industrial, Work, and Organizational Psychology (pp. 53-76). London: Sage Publications.

Garrison, Ray H., Eric W. Noreen, Peter C. Brewer (2009). Managerial Accounting (13 ed.). Boston: McGraw-Hill Irwin. Hansen, Don R., Maryanne M. Mowen, Liming Guan (2007). Cost Management: Accounting and Control (6 ed.). Mason, OH: Cengage Learning. Johns, G. (2001). The psychology of lateness, absenteeism, and turnover. In N. Anderson, D.S. Ones, & H.K. Sinangil (Eds), The Handbook of Industrial, Work, and Organizational Psychology (pp. 232-252). London: Sage Publications. Wright, P.L. (1991) Motivation in organizations. In M. Smith (Ed), Analysing Organizational Behaviour (pp. 77-102). London: Macmillan Education Ltd.