Unprofitable Operations
After reviewing your financial information, we have decided upon some recommendations for your company. The information you provided us is as follows: your firm currently uses 50,000 workers to produce 200,000 units of output per day. Your daily wage per worker is $80, and the price of your firm’s output is $25. Your cost of other variable inputs is $400,000 per day. We have made a fixed cost assumption of $1,700,000.
Your output is $25 per unit, producing 200,000 units, which brings your total revenue to $5,000,000. You pay $80 per day to workers, and you have 50,000 workers, which brings your variable cost to $4,000,000. When adding in your miscellaneous expenses of $400,000, your variable cost is brought up to $4,400,000. This leaves you with a profit of $600,000. Your fixed cost is estimated at $1,700,000, giving you a total loss of $1,100,000. With a continuing loss, your company will not be able to survive, therefore changes must be made. We looked at a deduction in work force of 13,750. We came to this number of layoffs by dividing the loss of $1,100,000 by the daily wages of the workers, $80, the amount of worker deduction needs to be 13,750. If you were to lay off this amount of people, the remaining workers would need to pick up their work to remain at 200,000 units of output. We determined the percent increase in production by looking at the current productivity level of each worker, which is 200,000 units/50,000 workers=4.0 units per worker per day. The productivity to break even would be 200,000 units/36,250 (workers remaining)=5.51 units of produced each day.
We believe that expecting over 25% increase in employee production is not realistic. The other suggestion we have is to bring down your fixed cost, possibly by relocation. We looked in to this too, but could not find a way for your fixed cost to be reduced by more than $600,000. The last option is to increase your unit price from $25 to $31. Looking into the...
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