Deciding Wether Or Not To Stay Open

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 consideration. For example if the firm has a loan on their property they will still need to pay that. In this case since the variable costs are covered through the sale of units produced with some profit left over, the firm would not have as big a loss as it would if it were to close their doors completely. If they were to close down they would have no profit along with the fixed costs to pay. Even though there is not a set figure for the firm's fixed costs I will make one up to use as an example. Let's say that the fixed costs are $3,000 per day, the equation would look like this:

Variable cost would still be $7,500 Fixed cost would be $3,000

Profit (while open)

Profit = Total revenue - Total cost

= 9,000 - (7,500 + 3,000)

= 9,000 - 10,500

= - $1,500 profit

Profit (after closing)

Profit = Total revenue -