Operations Decision
Assume you have been hired as a managing consultant by a company to offer some advice that will help it make a decision as to whether it should shut down completely or continue its operations. It currently uses 100 workers to produce 6,000 units of output per month (working 20 days / month). The daily wage (per worker) is $70, and the price of the firm's output is $32. The cost of other variable inputs is $2,000 per day. You are told that the firm's fixed cost is "high enough" so that the firm's total costs exceed its total revenue. The marginal cost of the last unit is $30.
Rough Financial Statement
Revenues
$ per Unit
Total
Expenses
Workers
Price Per Day
$70.00
Number of Days
Subtotal
$140,000.00
Variable Costs
$2,000.00
Subtotal
$40,000.00
Total
$180,000.00
Gross Revenue
$12,000.00
Business Overview
The company currently represents one of the last apparel manufactures that still manufactures all of its products in the United States. The company has been able to maintain its U.S. operations despite rising costs because the target market is in a niche that allows the company to charge a premium. All of the other manufactures in this industry have outsourced their entire manufacturing operation to foreign markets to take advantage of cheap labor and lower their operating costs....
Mexico has bene a popular destination for a bulk of the industry given its proximity to the United States. However, this company call, U.S. Custom apparel, has decided to continue production in the U.S. because it supports their market niche. Furthermore, the company has a built a loyal customer base that values the fact that the company uses domestic labor and it willing to pay a premium for these goods.
However, at the same time, the company's strategy is not profitable nor does it show any future potential. The current gross profits are roughly twelve thousand dollars before fixed costs are considered. Therefore, when fixed costs are added, it is reasonable to suspect that the company is operating at a substantial loss. While U.S. Custom Apparel can produce goods at roughly five dollars to twenty dollars per unit, many of the competitors can produce comparable products often with comparable quality for a fraction of the cost (Institute for Global Labour and Human Rights, 2005). Therefore, the time has come for the company to decide if its operating model is sustainable any longer given the competitive environment.
One of the emerging business trends that have helped companies keep their expenses down is that many are outsourcing a lot of administrative business functions. In the global market, small to medium sized enterprises (SMEs) can outsource entire business functions in order to keep their internal staff levels down. It is not only SMEs that have taken advantages of outsourcing opportunities in other countries such as India and…
