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Financial Management

← Production and Operations Management Business Management Questions →

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1. Total valuable cost = 50000*90+$400000=4500000+400000

TVC= $4.9

2. Average variable cost= $4.9/0.2

AVC= $24.5

3. Average Total cost= fixed cost +Total valuable cost/ units of output per day

     = 1million+$4.9/0.2

      = $29.5

4. Worker productivity= 200000/50000

       = 4 units per worker each day

When the firm is incurring a fixed cost of 3million the total valuable cost will remain the same, the average variable cost also remains the same, and the worker productivity remains unchanged. The only value that will change is average total cost and the total cost.

Average Total Cost when fixed cost=3million

                        AFC= 3million+$4.9/0.2

                             =$39.5

When the firm has fixed cost of 1million, it will make a loss of:

                Total revenue-total cost

                 (200000*$25)-($4.9+$1)

                 5million-$5.9=$0.9

                 Loss of $0.9 in this case the firm should not close down immediately as the loss is not too much, some adjustment can be done.

When the firm has a fixed cost of 3million, it will make a loss of:

               (200000*$25)-($4.9+$3)

                 5million-$7.9

                 Loss of $2.9 in this case the loss is too much, and the firm can close down immediately instead of continuing to make more losses.

For the company to break even the some of the workers will be laid off, in first situation when the firm has 1million fixed cost

               5000000=1million+90*x

            4million=90x

The number of workers required when there is a fixed cost of 1million is 44444 workers; therefore, (50000-44444) will be laid off

                        =5556 workers will be laid off

For the company to break even some of the workers will be laid off, in second situation when the firm has 3million fixed cost

            5000000=3million +90*x

            2million=90x

The number of workers required by the firm when there is a fixed cost of 3million is 22222 workers; therefore, (50000-22222) will be laid off

                        =27778 workers will be laid off       

With lower number of workers the worker productivity will change, in the first situation 44444workers will be left, and their work productivity will be

                        200000/44444

                                   =4.5units per worker each day

In the second situation, 22222 workers will be left working, their worker productivity will be

                        200000/22222

                                   =9.0 units per worker each day        

Discussion

In the first case when the fixed costs are 1million and the output remains 200000 units, the worker productivity will increase in a small quantity. The worker productivity increases from 4 units per worker each day to 4.5 units per worker each day. Such a firm should not be closed down immediately but the workers can worker extra harder (Cheryl, 2006). In the second case when the fixed costs are 3million and the output remain 200000 units, the worker productivity increases greatly with more than double. The worker productivity increases from four units per worker each day to 9.0 units per worker each day. Managing this worker productivity can be a challenge. If workers are working for twelve hours per day they may be required to work for 24 hour per day, meaning being active for both day and night. Such a company may be forced to close down immediately, as managing to cover such losses may be impossible.

The company cannot just close down because of making losses. Even if the company stakeholders loose all their money, that is not an enough reason for the company to close down. When investors and other stakeholders were investing their money in the company, they knew that they could loose their money in the process of developing the business. When starting a business the investor becomes ready to make either profit or loss (Hill, 2007). Profit and loss are both outcome of conducting business, and the investors should be ready to meet that challenge. There many companies that have made losses for several years, and later they improve and start earning profits. The company can only close down due to three reasons only, members’ voluntary liquidation, creditors’ voluntary liquidation or compulsory liquidation.

The company should come up with other ways of reducing costs to avoid making losses. There are some simple things done in companies that add many expenses like printing both sides of paper. The papers are a great part of company expenses; big companies use thousands of money in purchasing papers. Another simple thing that at the end of the month consumes a lot of money is by use of color printing, the company should exercise the use of black and white printing. If the company is badly off, it can also close its doors for one week, while negotiating with the employees to make use of their vacation time to boost the level of the company.

When conducting the meetings, the company should consider the use of video conferencing as this would help in reducing many expenses. So many equipments and stationeries are needed for the meeting. These would be required to prepare a company meeting, and very expensive, but the use of video conferencing is very crucial in reducing the expenses. The company should make use of expertise to review the company expenditures, this will cut many costs, the most sensitive areas will be spotted out, and the company will have an opportunity to concentrate on those areas (Brigham, 2010). The data of all the usage of money in the company should be cared for. This can be achieved by the use of the most appropriate software of collecting data. Closing of the company should be the last option.

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