Operations Decision This business makes hand-crafted chairs in New Mexico. The chairs are made for a company that brands them and markets them through a variety of channels. Wood is either local or from Colorado, and the craftspeople have modest woodworking skills to construct the chairs.

The environment is competitive for this product. Chairs are a fairly easy product to make. The more trade agreements the government signs, the more competition there is for this business. Our company, therefore, has very limited bargaining power over the buyers, because the buyer can substitute product from Mexico, China and a number of other low cost sources. Only lower shipping costs and the strong established relationship seem to be in our favor.

The contract of this major buyer is the main determinant of whether or not we will shut down. The buyer in turn is affected by the global furniture market, tariffs and trade barriers, the emergence of other competitors who can supply these chairs, and the value of the U.S. dollar, which is an important factor on whether or not it is cheaper to import the chairs. Without the buyer, we are unlikely to sell enough chairs to maintain the operation. However, we have stood strong in this challenging environment for a few years, and it is important to consider that we have the potential to grow the business as well.

3. There are several aspects to the company's financial performance. The income statement can tell us if the company is making a profit or not:

Revenue

192000

DL

140000

Variables

40000

Net Income

12000

The company earned $12,000 last month. Marginal revenue is $32, and marginal cost is $30. The average total cost is $30 at this point.

Based on the profits, the company should continue. However, there are some concerns about the long-term viability of the company. In the...

At this point, with a marginal revenue of $32 and marginal variable costs of $30, this is the case. So for the short-run, the company should continue in business.
In the long run, a company should remain in business if marginal revenue does not cover marginal costs. At this point, that is also not the case. The marginal revenue exceeds marginal costs. A concern for the company, therefore, is if wages in New Mexico rise. We pay $8.75 per hour now. Suppose the state increases the minimum wage to $10 per hour. This would give a direct labor cost per month of 160,000.. At that point, the company would be losing $8,000 per month.

We have already established that the company has no bargaining power, so the price it receives for the chairs is fixed. With this new increase in cost, the company will have to re-examine its economics, both for the long run and the short run. We don't know what the fixed cost is, but at this new point the marginal cost is $33.33, so the marginal revenue is below the marginal cost. Thus, the firm would have to consider shutting down if it cannot find a way to become more efficient and lower that marginal cost.

4.

To improve profitability, there a few different steps that can be taken. The first is to find more customers. Covering fixed costs is easier when there are more sales. This spreads the contribution margin around to more products. Such a tactic is especially useful for firms how find they have little bargaining power to earn higher margins. However, another strategy is to improve bargaining power and earn higher margins. Costs increase, and if the minimum wage goes up, the company might not have much choice but to pass that along to its customer. The customer could react poorly, but it might value other attributes of the company enough to retain the business.

Another strategy…