Accounting Assessment of Costs and Book Report

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One example has been the printer market; firms will often subsidize the printers that are sold, with the aim of creating long-term profits by the ongoing sale of the printer cartridges (Thompson, 2007). The cellular telephone market also operates in a similar manner, with mobile phone service suppliers subsidizing the cost of the handsets in order to gain a contract from a customer, the cost of the subsidy is offset against the profit that will be gained on the service contract. Therefore, the firm will need to look at the impact that ending production may have on the sale of other goods. However unless there is a complimentary item then it would appear some changes may need to take place.

If there is a loss with the fixed costs of $1,000,000 it is will be expected that higher fixed costs will increase the loss.

Assessment with fixed costs at $3,000,000 per day

If the fixed costs are higher or increase the calculations will change and the average total cost per unit will change. The total and average variable costs will not change, so the same figures already calculated may be used. The average total cost is increased as shown in table 6.

Table 6; Average total cost with $3,000,000 fixed cost

Total variable costs (a)

4,400,000

Total fixed costs (b)

3,000,000

Total costs (c ) (a + b)

7,400,000

Number of units (d)

200,000

Average total cost (c/d)

37

The average total cost per unit is now 37; this is a significant increase and shows that the firm is loosing 12 per unit produced (37-25). This can be used to look at the new total loss incurred, which is shown in table 7.

Table 7; Loss for each scenario

Number of units sold (a)

200,000

Price per unit (b)

25

Total revenue (c ) (a x b)

5,000,000

Total costs

7,400,000

Profit/loss

-2,400,000

The loss has increased significantly.

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The decision whether or not to continue production remains the same as in the previous scenario, with the need to consider the overall impact it is having on the firm, either tying up resources and creating overall losses, or supporting the sale of complimentary items. If there are complimentary items, in this instance the profit would need to be higher to compensate for the losses compared with the previous scenario.

Reducing Employees

In both cases the way in which the firm may turn around the loss and break even is by adjusting the variable costs, assuming the fixed costs and total production cannot be changed. With the knowledge of the total loss for each scenario and the average wages, the potential for reducing the total cost by reducing the number of workers may be assessed. The calculation showing the number of workers that would need to be lost is shown in table 8.

Table 8; Reduction in workers required for breakeven

$1,000,000 fixed costs

$3,000,000 fixed costs

Loss

400,000

2,400,000

Average wage per employee

80

80

Number of employees

5,000

30,000

The scenario with fixed overheads of $1 million would require the workforce to be reduced by only 5,000, which is a 10% reduction, and would require the remaining employees to increase their productivity to 4.44 units per day, which also an increase may be seen as potentially viable as it is only 11% increase. However, in the scenario where the overheads are $3 million, the workforce would need to be reduced by 30,000, which is equivalent to a 60% reduction in the workforce. In order to continue producing the same level of units per day productivity would have to increase to 10 units per day, an increase the 150%, and unlikely to be viable. Therefore, while it.....

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