Production Cost Curves Every Company example essay topic

Production / Cost Curves Every company has some kind of Revenue and they all have costs that are associated with running the company. It is also true that if a company wants to increase their Revenue, their costs will increase too. It is every company's goal to maximize revenue and either through Production or Services, and minimize cost. These things are easy to figure out, but actually identifying the production and figuring out how it will increase or decrease with change is very difficult. In Fred Meyer our output like in all grocery stores, is not a product but the amount of items we sell. Sales is what drives the company, it is the source for our Revenue.

Similar to manufacturing companies where they have numbers that tell them how much they produced, we have numbers that tells us how much we have sold. Every department has a goal that they have to reach. They have to sell their products to come to that number. The number varies daily, and managers expect from every department that they will sell more products compared to last year.

For departments to achieve that, managers have to look at the output level and decide how they can increase profit. It will be very difficult for them to do that because if they want to increase the production / output which is sales in my situation, they would incur costs. So if managers decide to try and sell more products, they could hire more employees to persuade customers to buy more products. We can see that when we go to "Circuit City" and "Best Buy", they have employees just standing around and not doing anything, but once a customer shows up, they are all over them. So for managers in my Home-electronic department they could hire more employees to sell more products.

That concept would not be very efficient after a certain number of employees are hired. If we h ire 10 more employee, than a lot of them would just stand around and be in the way of customers and even each other. This situation could be a bottleneck for people that are trying to get something done. Graph A could best describe this example. This graph shows you what happens to the output when more labor is added. The output will slowly level off and then start to decline.

If the managers want to maximize the output they would have to look at the max point on the graph to get the highest output with the lowest labor force. I am estimating that in my company the curve does look like that. I am positive that we are understaffed and that if they hire more people, they would have more sales. The dot represents my department at this moment; they are still capable of growing.

Controlling the cost in our department is also very important to our manager. They are forced to cut cost anywhere they can by their superiors. A lot of managers try cost cutting by having less people work at the department. Identifying the cost that can be cut is very difficult and managers are struggling to do it. In our department and every other in Fred Meyer, managers use sales from last year to schedule how many people are going to work that week. So if last years sales were high, then he would schedule more people to work.

The labor column shows that when sales increase, labor cost increases too. Machine cost will do the same thing because more registers and electronic equipment is used by the employees. The ATC will have a curved graph because at the beginning the machine cost and labor cost will be high because there sales are low. The ATC will be high at first, and later cost will be slowly decreasing, so that the graph will also decrease, due to high sales.

Later the variable cost of the labor will be so high that it will take the ATC up again to 56.7. This is all directly tied to the second paragraph. As we start increasing the labor, the output will eventually slow down, kicking the ATC back up again. So if we have a lot of people working in my department and the output can't increase anymore then our cost compared to our sales rises, simple as that. This graph above shows it again how when the output slows down or stops, the Total variable cost increases. The production or sale would increase as we add more labor, but then eventually it would level off and start decreasing as we add more people.

This would happen because the employees are in each others way, creating a bottleneck in the operations. For the cost, it would be opposite. The cost of production or sales would be higher at first and then as output increases ATV would decrease until the point when output starts decreasing due to too many employees, the ATC will start increasing again. I am not positively sure that theses estimates are right for Fred Meyer, but for me this estimate would make sense.