Managerial Econ the Breakeven Point Reaction Paper

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Workers tend to be a fixed cost, and a company facing permanently reduced demand should reduce its fixed costs, which probably means cutting the number of workers. However, a recession is not a permanent reduction in demand so the response has to be a bit more intelligent, knowing that eventually the business cycle will recover and the company will need to hire back workers when demand picks up again.

However, for some companies lowering the number of workers removes talent from the company that cannot easily be replaced when the economic situation improves. Some companies, like FedEx, prefer to avoid laying off permanent employees because the costs associated with hiring and training new employees are higher than if the hours of all existing permanent employees are reduced.

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Thus, the answer comes down to the nature of the business, the nature of the employees who would be removed and the other costs associated with each proposal (buyout costs, training costs, etc.). If the two options are cost neutral (an equivalent dollar value is saved via either option) then the option that works best for the functionality of the company is the one that should be chosen.

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