Global enterprises is a business entity whose operations mainly involves the labor as the main factor of production in the operation of its activities. The output of the business therefore relies heavily on the labor force available for production in the business. The labor force in the business organization since the number of laborers is 100 workers. The output of this business is 6000 units per month. The number of units is fairly proportional to the labor force of the business entity. The fixed costs of this business are relatively high compared to the variable costs of the business. This therefore made the total costs to be higher than the total revenue of the business a fact which results in losses. This high portion of the fixed costs makes the operational activities of Global enterprises expensive and difficult to run the business towards profitability.
The business also reflects the effect of both variable and fixed costs in the short run and long run. The fixed costs are always variable in the long run therefore may have a great impact on the operations and managerial decision making. The business should therefore take all the costs into careful analysis and consideration (Samuelson, 2010 pg28).
The activities of Global enterprises are complex especially on matters pertaining to the operational activities of the business. The business therefore incurs the high costs which greatly influence decision making in the business. Decision making pertaining to this business is therefore based on the cost drivers in operation of this business activities. The wages of the laborers makes a great proportion of this business thereby leading to a reduction in the profit margin.
In the context of decision making in this business, the cost of labor is main factor that should be taken into consideration in order to determine the level of contribution. The contribution effect is therefore the main important factor in assessment of the performance of this business especially in relation to profitability of the business. The quantity and quality of labor in this business organization is very essential in that it directly affects the operational and production activities of this business. The cost of labor is therefore an essential factor which should be carefully analyzed in order to make decisions concerning the closure or continue with operations of the business organization (Graham, 2013 pg23). The cost of labor makes a great portion of the variable costs of this business organization thereby influencing strategic decision making in this business due to the effects on the contribution effect.
The cost of the variable inputs is also a factor of consideration in determination of the contribution that is the gap between the variable costs and the output in order to determine the actual profitability of the business. The cost of variable inputs greatly affects the levels of production and operational decision-making. The cost of variable inputs therefore influence the decision making in the business. The variable inputs thereby plays a vital role in ensuring that the profitability of the business is critically assessed in order to make relevant decisions on whether to continue or discontinue operations of the business organization(Harder, 2012 pg18). The business should therefore do a careful analysis of the costs of variable inputs thereby facilitating determination of the contribution margin as well as the profitability and performance levels of this business organization.
The cost structure of this business is therefore an important factor to be taken into consideration in determination of the decisions whether to continue or discontinue operations of the business. The proportion of variable costs with respect to the fixed costs should be analyzed in order to determine the contribution margin which in turn affects the production activities and the managerial decision making. The management of this business should therefore consider the effect of the fixed costs in the long run in order to determine effect on contribution margin in the business. The effects of both the variable costs and fixed costs in the short run as well as the long run greatly affects the operational and managerial decision making in the firm on whether to continue or discontinue operations(Harder, 2012 pg24). The effect of all costs in the long run should be carefully analyzed in order to help in both operational and managerial decision making.
In the context of financial performance, this business organization should take into consideration the effect of marginal costs on operation and managerial decision making process. The impact of variable costs of inputs and the labor costs are the most important and crucial factors in the short run (Graham, 2013 pg26). The business short run decisions should therefore be carefully analyzed with the help of the variable costs since they are the only costs which change in the short run. The key drivers of business performance in the short run are the variable costs of labor and the variable costs of inputs of this business. The variable cost of labor per month is $140,000(100 workers X 20 days X $70) while the cost of variable inputs is$40,000($2000 x 20 days) leading to a total monthly variable costs to $180,000.This cost of $180,000 is a factor that should be fully taken into consideration and thorough analysis in determination of the their impact in the short run decisions and operations of this business organization. The output of the firm on the other hand is $192,000(6000 X $32).The fixed costs are not taken into consideration in the short run because they do not change. The decisions of the business in the short run are based on the contribution margin which is $52,000(192,000-140,000) thereby the business should continue its operations since the contribution is positive and it indicates that the revenues of the business are higher than the variable costs of the business.
In the long run, the high fixed costs are likely to change in the long run because fixed costs are always variable in the long run due to increase in scale through expansion. This business unit should therefore take into consideration the long run effects of the fixed costs because they will influence the way the operational activities of the business and the managerial decision making especially in relation to financial performance of the business entity. The business should therefore operate up to the breakeven point in order to indicate levels of minimal cost while maintaining optimal profits.
The company can improve its profitability by reducing the marginal cost while at the same time increasing the levels of output in terms of revenues. The reduction of marginal costs of production as well as increase in levels of output may be done through adoption of improved technology in order to increase the levels of output by making production activities effective and efficient. The business should also adopt high or improved technology which helps in compensating the labor force at the least time possible. This will therefore help improve productivity and profitability of the business (Thomas, 2011 pg18).
The business organization should therefore put in place strategies which are worth in reducing costs of production while at the same time increasing the number of units produced by the adopted technology so as to increase the contribution margin thereby boosting profitability of the business.
The management of this business organization may discontinue its operations in instances where the total revenue variable costs are more than the total revenue since the contribution effect will be negative leading to failure of the business. The business may therefore ay not even continue to operate to low levels of output accompanied by high costs of production. This business may therefore discontinue its operations in the long run if the fixed costs of production increases greatly to levels beyond the control of the business.
Graham, R. C. (2013). Managerial economics for dummies. Hoboken, N.J: John Wiley & Sons, Inc.
Harder, M. (2012). Managerial Economics. Delhi: Orange Apple.
Samuelson, W., & Marks, S. G. (2010). Managerial economics. Hoboken, N.J: John Wiley & Sons.
Thomas, C. R., & Maurice, S. C. (2011). Managerial economics: Foundations of business analysis and strategy. New York: McGraw-Hill/Irwin.