Managerial Accounting Total Variable Costs = #

Managerial Accounting

Total variable costs = # of workers * daily wage + other variable costs

TVC = (50,000*80) + 400,000

TVC = $4,400,000

Average variable cost = TVC / units of output

AVC = $4,400,000 / 200,000

AVC = $

Average Total cost = (TVC + TFC) / units of output

ATC = ($4,400,000 + $1,000,000) / 200,000

ATC = $

Worker Productivity = units of output / number of workers

WP = 200,000 / 50,000

WP = 4

The total and average variable costs do not change if there is a change in the fixed costs so, nor does worker productivity:

TVC = $4,400,000

AVC = $

WP = 4

The average total cost does change. The new figure for average total cost is:

ATC = ($4,400,000 + 3,000,000) / 200,000

ATC = $

Under the first scenario the profit is calculated as follows:

Profit = Revenue -- VC -- FC

P = (200,000 * 25) -- (4,400,000) -- (1,000,000)

P = 5,000,000 -- (5,400,000)

P = (400,000)

For the second scenario, the loss is even larger:

P = (5,000,000) -- (7,400,000)

P = (2,400,000)

Under neither of these scenarios should the firm automatically shut down. The company is producing at a variable cost of $22 and selling for $25. This means that there are a couple of ways to become profitable. The first is that the firm could increase volumes so that the average fixed cost per unit is under $3. The second is that the firm could sell at a higher price, if that will maximize profit (even though a higher price implies lower volume).

4. Using the first scenario, if we calculate the number of workers to be laid off by dividing the loss for the two situations by the daily wage per worker, the number of workers to be laid off is:

($400,000) / (80) = 5000 workers

Given the lower number of workers now working at the company, if we assume output to be the same, the productivity is as follows:

200,000 / 45,000 = 4.44

5. The change in workers is not too large. The firm should not shut down immediately. The change in workers is a decline of 10%. This has increased productivity by 10%. This is a significant change but not a dramatic one. The firm's AVC is now as follows:

((45,000 * 80) + 400,000) / 200,000

(($3,600,000) + 400,000) / 200,000

$20

The firm is still selling the product for $25, but it now has an average variable cost of $20. This means the firm should not shut down immediately.