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ECO 550 Interpreting Macroeconomic Conditions

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Economics

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Operations Decisions
Assignment 1: Operations Decisions
ECO 550- Managerial Economics and Globalization
1. Briefly describe the details of the fictitious business that you created
for this assignment.
There are currently 100 workers being utilized that work for 20 days per
month at a wage of $70 per day. The workers produce 6,000 units of
output per month with variable costs of $2,000 per day. The fixed costs
are not disclosed and we are told they are "high enough" so the total
costs exceed the firms total revenue. The price of the firm's output is $32
and the marginal cost of the last unit is $30.
2. Access the current environmental scan factors. Determine the factors
that will have the greatest impact on plant operations and management's
decision to continue or discontinue operations.
Given the information supplied the biggest factors of an environmental
scan are; the time frame the business hopes to be in the market (short
run vs. long run), the elasticity of demand for the item the firm produces,
competition (many firms vs. few firms), and production costs. Some
other minor factors of an environmental scan show that learning curve of
workers versus experience, turnover, and markets.
Time frame is one of the most important factors given the information
about Company ABC because the fixed costs are not given but told to be
"high". The reason this is a major concern has to do with the fact that in
the short run not all inputs are variable and variable costs are dependent
upon production. Production using the variable inputs is the only way to
change profit losses or profit maximums. If the company has long run
plans then the fixed costs issue is not the biggest problem at the
moment because all inputs are variable and can change accordingly to
the management's decisions. Given that we do not know the fixed costs
it is crucial to access all possibilities. "Access to capital is a major
problem for start up businesses.." (Access to Capital). Due to this
information most businesses have higher fixed costs due to the capital

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needed for the land, building, or services from labor to produce a good
or service to sell.
Production costs are the last main topic of environmental scan factors
that have the greatest impact on Company ABC. Production costs are
one of the main factors used to determine if a company even opens.
Simply put a firm cannot continue to operate in the long run if the costs
of production are more than the total revenue earned from selling the
item at the market price or TR= or >TC. It is possible for firms to
minimize loss in the short run where there are fixed costs versus not
producing at all, which will be discussed in more detail as it relates to
Company ABC.
The competition the firm faces is one of the most important factors for a
firms survival for many reasons. There are various forms of competition
and at the two extremes there are perfect competition and monopolies.
These are extremes used as models for firms because the facts in where
they exist are so hard to match to an actual firm that it is a better building
block model. Certain conditions fall close to these two models and for
that reason they are used as a comparison as usual assumptions are
placed with more realistic assumptions (Michaels,R.J.). The major
reason for our reasoning has to do largely to the fact that if we assume
perfect competition then our firm may not survive the long run all things
equal and if our firm is a monopoly it would be able to set the price
where it is profitable without worrying about controlling the buyers from
re-selling the product (Martinka, R.). Even if the firm was a monopoly the
main factor left out is that the consumers have a choice if they should
buy the product or live without it, so it is not a true price setter. In a
current day environmental scan would show that there are many firms in
society for most products which makes it possible that no one firm can
influence market price and many firms can coexist.
Elasticity of demand is next relevant environmental factor because it
shows how price effects demand on certain products and services for a
buyer. Items that have a high elasticity of demand, such as luxury
vehicles and expensive designer items, are very likely to experience that
as prices rise there is a decrease in demand (Webster's New World
Finance). The most common sense way to explain this is out of need
versus want which relates to supply and demand. Everyone wants a nice
house but to get that nice house the consumer needs an item to trade, in
today's society it is money or the US Dollar. This is an item that can be

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foregone whereas items with inelastic demand are more resistant to
changes in price. This is due to the item being of more use on an
everyday level such as groceries, gas for our cars to get to work,
electricity for our house, etc. If the product that is being made at
Company ABC has one or the other determines what advise will be
ultimately given.
3. Evaluate the financial performance of the company using the
information provided in the scenario. Consider all key drivers of
performance, such as company profit or loss for both the short term and
long term. Be sure to show the calculations that helped you reach your
conclusions.
To access the financial performance it is best to begin by performing
simple calculations to have a better understanding. The first was to
determine the total variable costs of production using labor cost and
daily variable costs given. The cost of wL is 100 workers times their daily
rate times days worked per month. This equation is 100x$70x20=
$140,000. Given was other variable costs of $2,000 per day at 20 days
per month, or $2,000x20= $40,000. Adding these up give Total Variable
Costs (TVC) of $180,000 per month. Moving on price is given as $32
and output per month is 6,000 units, total revenue is calculated. TR= P x
Q or Price ($32)x Quantity (6,000) = $192,000 (Michaels, R.J.). AVC=
(TVC/Q), or AVC= ($180,000/6,000)=$30. TFC are not stated but can be
assumed to be TFC is greater than $18,000 because it states fixed costs
are "high enough" so that total cost exceeds total revenue which shows
TC > $192,000 using, TR = $192,000 - TVC ($180,000)= a difference of
$18,000, FC> $18,000. With these numbers management can decide
whether it is best to produce and take a loss to cover some costs or not
to produce at all. TP is equal to TR - TC or TP= TR - TC. Our job is
minimize loss and using the following equations show that if we shut
down there we will lose more fixed costs which FC > 18,000 and if we
stay open then we need TC (TC= TVC+TFV) > TR. Since TR is shown
as $192,000 and TVC $180,000 it shows that operating reduces TL by
the formula used: TL > 18,000- 12,000= 6,000. Using the data above it is
best to continue operations since the total loss will be offset by $12,000
in revenue that is generated by staying open. Instead of incurring
>$18,000 in loss the company would only incur TL>$6,000, where it is
offset by the $12,000 revenue from operating. Performance is an issue
also given that P =/= MC, $32=/=$30, to maximize profits a firm wants
price (P) to equal marginal cost (MC), P=MC.

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