Economics Discussions Production Costs Postal Service (USPS) Essay

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Economics Discussions

Production Costs

Postal Service (USPS) operates at a loss but its closest competitors -- UPS and FedEx -- both operate at a profit. Suggest how fixed costs have contributed to the situation of the USPS. Provide support for your response.

I would suspect that the fixed costs of contributing to employee's retirement funds (Risk Analysis Research Center, 2009, p. 4) and also their restriction from closing local offices (Slentz and McCann, 2009, p. 12) contributes to higher fixed cost at USPS than FedEx because FedEx is not unionized and while UPS is unionized, and thus experiences a fixed cost that is incurred to the level of union contracts, those contracts are more negotiable for UPS than USPS, and nonexistent or fluid for FedEx. Furthermore while union contracts probably affect the rate of closure for physical facilities for UPS, this would probably be more negotiable than for USPS and FedEx especially if FedEx operates totally under 'right to work' management structures. The fixed cost USPS inherits from its special status as an 'off-budget' but still in some ways regulated recipient of federal transfers mandates it upholds these precedents from an era without UPS or FedEx.

2. You are the owner of a manufacturer of widgets. You experience additional demand for the product that you don't want to ignore.

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Propose three methods to take advantage of the demand using your existing facility while minimizing costs. Analyze the advantages and disadvantages of each method. Provide support for your response.

The first method would be to run the plant at overtime. If there is a union contract, this may not be possible; likewise, if that produces more than the demand, then this may result in excess inventory. The second method would be to add shifts to the existing plant, which may result in excess inventory if not forecast precisely, and may also be prohibited by union contract if that is a factor. The third method would be to purchase bulk product at wholesale and sell that at retail to the demand. This would not involve running plant at overtime or on second shift, and may very well minimize cost. Without either adding production, or purchasing additional inventory outside the plant, the final way would be to 'produce twice as much using the same input costs.' If we could do that, we would do that all the time, and increases in demand would not be a problem, we could just magically create more using the existing plant, which we could have done before, but decided not to for some reason.

Sunk Costs and Perfect Competition

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