Managerial Economics and Globalization, ECO550
At certain times a company that produces a tangible product may have to decide if that company can continue operations and profit or if it has reached the shutdown point. Shutting down is different than going out of business; the company is simply temporarily stopping production because it would cost more to continue with production. As a management consultant hired to assist with this decision, one must consider costs associated with the production.
Factors that will have the greatest impact on this decision are labor costs, fixed costs, and variable costs. Labor costs are costs associated with the work force; fixed costs are costs that will remain constant given any factor of output; and variable costs are costs associated directly with the level of output (labor is part of variable costs).
Company management with the assistance of the hired consultant will consider external environmental factors of supply and demand, competition, efficiency and any possible constraints. Overall a for-profit company strives to maximize profits while keeping costs as low as possible; but in the short-run the company must determine if that company can at least cover variable costs at a given level of production and in the long-run cover total costs (variable and fixed) and still make a profit.
Fashion Watches is a company that produces women’s inexpensive fashion watches. The watches have bands made from latex and colorful faces that include cubic zirconia. The watches come in all variations of color and watch face designs (placement of CZs). The watches are offered at reasonable rates with the idea that women will buy multiple watches to match many different outfits and clothing combinations.
Fashion Watches currently employs at the Erie, Pennsylvania factory 100 workers that produce 6000 units (watches) per month or 300 units per...