As management of a firm Should I continue to operate at a loss?

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. How do I answer this question, and how do I show my work. Please help me this is my last assignment. Thank you.

Answer 1

You would continue operate. Possibly temporarily, until things turn around or you have to pay major fixed costs again.

What you have is $9,000 revenue and $7,500 variable costs per day. Thus you are contributing $1,500 a day toward fixed costs. The point of the exercise is that you can contributed $1,500 a day by staying open or $0 if you shut down.

So, if you spent $100,000 on fixed costs like buildings, equipment, insurance. And if you figure you are going to get next to nothing for liquidating those costs (especially specialized equipment, prepaid insurance, and prepaid rent) Then here is the comparison

Shut down today - loss $100,000

shut down a month from now - loss $100,000 - 45,000 (30 days at $1,500/day)
loss is $55,000

Answer 2

First as Management you are not the OWNER or STOCK HOLDERS so your only concern is operating at the most profitable level possible as long as the owners or RECIEVER(you could already be in recievership ) tells you to and YOU are getting paid to .as for taxes after 3 years a sole propritership still in the RED becomes a HOBBY in IRS view and cant write off any more losses

Answer 3

70 Workers
300 units output/day
$100 worker/day
$30 revenue/unit
$500 other costs/day
-------------------------------------------
300/70= approx. 4.29 units/worker/day
100/4.28= approx. $23.33 cost of labor/unit
23.33*300=approx $7,000 + $500 (other costs) = $7,500 total cost/day
300units sold at $30/unit gives you $9,000 in total revenue
$9000 - $7500 = $1500


...oh yeah. You need to hire more workers (if possible) and create more output in order to cover your fixed cost. i.e. If you had 3000 a day in fixed costs, you should double your output and get yourself out of the red.

Answer 4

Families can not operate at a loss, they wind up on welfare.
Business can not continue to operate at a loss.
Either cut costs or increase production and demand for your product.

Answer 5

LOL! I think it's a trick question because depending on the age of the business, you'll get one hell of a tax break.