Laura Coplai
Liberty University
BUSI 620:B01 – Global Economic Environment
Discussion Board 4 – Part 1
1. Tetrangle Manufacturing has fixed costs of $2,160 per day. The firm
manufactures bicycle component upgrade kits. The kits have a short-run average
variable cost of $48 and are sold for $66 each.
What is the breakeven level of daily output for the firm?
What is the degree of operating leverage when the daily output is Q = 170?
The breakeven level of daily output can be configured using the following
equation: Breakeven Point = Fixed Costs / Contribution Margin per Unit.
CMU = Sales Price – Variable Cost = $66 - $48 = $18
BEP = $2,160 / $18 = 120
The breakeven level of daily output is 120 units per day.
The degree of operating leverage can be configured using the following equation:
DOL = (Sales – Variable Costs) / (Sales – Variable Costs – Fixed Costs). When Q = 170,
sales are equal to 170 x $66 = $11,220. When Q = 170, variable costs are equal to 170 x
$48 = $8,160. Therefore:
DOL = ($11,220 - $8,160) / ($11,220 - $8,160 - $2,160) = $3,060 / $900 = 3.4
The degree of operating leverage is 3.4 when the daily output is Q = 170.
5. As an employer wants to reduce the production cost during the economic
recession, he/she could choose to (1) lay off some workers without changing wages or
(2) keep all workers but cut wages for all. Which method would you choose? Why?
If I were faced with either laying off workers without changing wages or keeping
all workers and reducing wages, I would choose to lay off some workers without
changing the wages. Following the aftermath of these decisions, the company has room
to breathe. Before that decision was made, however, I would look to alternative solutions
to reduce the production cost during the recession. If the second decision was made, it
would not be fair to reduce the wages of all employees, as the company is losing money.
Even if I were to keep all the workers employed, they would still suffer at home, not
being able to keep up with their standard way of living. If they went on unemployment,
they would at least earn some wages while looking for new work. However, wages are
not the problem, the economy is. For example, the economic recession in 2008 led to
“job losses steepen[ing] and unemployment rates [rising] sharply heading into 2009”
(Akers & Henderson, 2009). After the recession, there would be a possibility to re-
employ the laid off workers with the company.
References
Akers, M., & Henderson, J. (2009). Recession catches rural America. Economic Review
[Kansas City], 94(1), 65+. Retrieved from
http://go.galegroup.com.ezproxy.liberty.edu:2048/ps/i.do?id=GALE
%7CA200844527&v=2.1&u=vic_liberty&it=r&p=AONE&sw=w&asid=fc015fb
27063af65feb294f2b26b439d
