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Firm's - Essay Example

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From this result, we add Other Variable Costs to find the Total Variable Cost. The number of workers and their wages are classed as variables because can fluctuate. Other Variable…
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Download file to see previous pages... This is an important figure to know because from this, the revenue price for each product can be calculated. The formula is shown below:
To determine Average Total Cost, we need to add the Total Fixed Cost to the above equation. The Total Variable Cost and Total Fixed Cost are summed together and divided by the units of output per day. This figure is another important number to know because it can be added together with the Average Variable Cost to determine the cost per unit. In this case, it would be $49 ($22+$27). The formula for Average Total Cost is displayed below:
To find out Worker Productivity, we simply take the units of output per day and divide it by the number of workers. This will give us the number of units that each worker produces each day. This formula is shown below:
Both sets of calculations have the firm’s output price at $25 and the Average Variable Cost at $22. The difference is in the Average Total Cost. The first scenario has ATC at $27, while the second scenario has an ATC of $37. However, in both of these cases, the AVC is lower that the output price. Because of this, the firm should not be shut down immediately in either case.
In terms of break-even numbers, we need to divide the total loss by the daily wage of each worker. For the first example, the $400,000 loss would be divided by $80 per worker (400,000/80), which equals 5,000 workers. If 5,000 workers were laid off, it would leave a workforce of 45,000. If we assume that production remains steady at 200,000 units per day, this means that Worker Productivity would have to increase from 4 units per day to 4.4 units per day (200,000/45,000).
The second case would have a loss of $2,400,000 divided by $80 per worker (2,400,000/80), which would result in a loss of 30,000 workers, leaving the workforce at 20,000 workers. If we assume that production output (200,000 units) remains the same, then each worker would have to produce 10 units per ...Download file to see next pagesRead More
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