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.