Production And Cost Curve

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.

Sales Labor cost Machine cost Total Cost ATC

10 $ 320 $ 270 $ 530 $ 56

11 $ 340 $ 290 $ 630 $ 57.3

12 $ 359 $ 320 $ 679 $ 56.6

13 $

...