How am I suopposed to show my work on this?

Question

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 deicision you outlined in your report.

Answer 1

The firm's daily revenues are $30/unit * 300 units = $9000. In contrast, the firm's variable expenses are only $100/worker * 70 workers + $500 = $7500. This implies that the firms fixed expenses exceed $1500/day, else the firm would be making a profit. However, since the fixed expenses do not change with the number of items sold, and the variable expenses are less than the revenues, it follows that increasing the firm's output will cause the firm's profits to increase in direct proportion to the output. Therefore, there must be some point at which increasing the firm's output will cause it to be profitable, and thus if the firm can be expanded to that point and assured of selling all its units, it should definitely remain in operation and be so expanded. If it cannot be so expanded, then it should be closed down, unless the fixed costs of operation cannot be avoided by closing the firm (for instance, the fixed costs include tax on a building which is essentially unsaleable), in which case it should remain open anyway, as the revenue from the firm will partially mitigate the fixed costs which must be paid anyway.

Answer 2

The question isn't about the money, is it? The bottom line is that you need to provide an opinion on if the firm should continue to operate. So, should it?

Does it matter what the product is? Will the product be something that will bring in more money later on, is this a temporary lull? Is the firm under contract, such that they have to continue to produce the product?

If you can make up parts of this, then build yourself a scenario. Write a report either supporting keeping the operation going or write something telling management to close down that section.