Microecon Financing in the Manufacturing Sector 50,000

Microecon Financing in the Manufacturing Sector 50,000 workers = 200,000 units Avg. wage = $80/day Output price = $25/unit Other variable costs = $400,000 Total Variable Costs = 50,000 x $80 + $400,000 = $4,400,000 Average Variable Costs = $4,400,000/200,000 = $ Average Total Costs = ($4,400,000 + $1,000,000)/200,000 = $ or ($4,400,000 + $3,000,000)/200,000 = $ Worker Productivity = 200,000/50,000 = 4 With $1,000,000/day in fixed costs at current output and productivity levels, the firm is operating at a loss of $2/unit, or $400,000/day. At $3,000,000 in fixed costs, the loss climbs to $12/unit or $2,400,000/day. Variable costs are covered in both scenarios.

Generally speaking, firms will only go into immediate shutdown when their revenue from production will not even cover the variable costs of that production -- when the loss would be greater by producing units than by ceasing production altogether (Bade & Parkin 2009). As the variable costs are covered by revenue regardless of which fixed-cost scenario is examined, it is not immediately necessary for a shutdown of the firm, however costs must be controlled somehow.

In order to break even at current daily output levels (200,000 units) and prices ($25/units), assuming that other variable costs could not be changed and fixed costs of $1,000,000/day were also unalterable, the firm would need to lay off 5,000 workers (at $1,000,000/day in fixed costs, daily losses for the firm are $400,000; $400,000 divided by the $80 average daily wage of workers = 5,000). This means that 45,000 workers would need to produce the same 200,000 units, increasing productivity to 4.45 (200,000/45,000 = 4.44444.