You've been hired by an unprofitable firm to determine whether it should shut down its unprofitable operation.
The firm currently uses 70 workers to produce 300 units of output per day. The daily wage (per worker) is $100, and the price of the firm's output is $30. The cost of other variable inputs is $500 per day. Although you don't know the firm's fixed cost, you know that it is high enough that the firm's total costs exceed its total revenue.
Provide a 1-2 page report to management of the firm as to whether or not it should continue to operate at a loss? Be sure to show your work to support the decision you outlined in your report.
Variable Costs
Daily wages = $100 * 70 = $7000
Other costs = $500
Total variable costs = $7,500
Revenue
Total daily sales from units = $30 * 300 = $9,000
Profit
Profit = Total Revenue ? Total Costs
= 9,000 ? Fixed Costs ? 7,500
= $1,500 ? Fixed Costs
After doing the calculations, the firm should continue to operate. Even though firm is only making $1,500 before fixed costs are subtracted they are still able to cover their variable costs. Since the firm's variable costs are $7,500 daily, we can assume that its fixed costs are more than the $1,500 left over after subtracting the variable costs. I would suggest that the firm continue to operate in the short term and revise their plan.
There are also other factors that need to be taken into cons ...