Table of Contents
With the given data available to us it is evident that the company is likely to make a loss with the current output levels as its Variable Costs (both wages and other variable factor costs) are fairly high. But the picture gets even bleaker when we add the fixed cost elements to the projected revenues as it takes both scenarios into a loss. Therefore the only way out of cutting the losses would be to reduce the variable elements which would constitute reducing the headcount and hence cost saving by reducing the costs being incurred in form of wages. Therefore on paper loss may be done away with by reducing the headcount and hence curtailing the overall variable costs which would take the production costing towards breakeven. However in both the projected scenarios (calculations attached in the annexure) it is evident that the output per person would be required to go up and significantly in the 2nd scenario.
We are basing our financial model on the assumption that the output per person is static. There are economies of scale in costs and in production (AIU Online, 2011). When we reduce our employees the Pareto efficiency should in all fairness reduce our per head output rather than increase it. As of now in the first scenario the production is required to marginally jump from 4 to 4.44 for each of the remaining employees which is not too far fetched an assumption. However in the second scenario the performance / output is expected to go from 4 per worker to 10 which is too grand and appears highly improbable to happen.
Our costing analysis and studies do suggest that as long as the average costs and in worst case average fixed costs are being covered the production line should be kept operational because the probability of making the business turn positive or making it breakeven seem open. In the given case average fixed costs is recoverable in both cases and company is exposed to an operational loss in form of not recovering the variable expenses which can keep the company afloat in the first scenario for short run while in second scenario even short run stint might prove to be difficult. Furthermore raising the output while reducing headcount is an ambitious task and seems unlikely to happen and that too even if possible then not by a long margin.
In our opinion the company would feel safer in the first scenario wherein the costs appear manageable and the loss can be curtailed by corrective rightsizing while pushing the staff to deliver slightly more. Financial do suggest that company would be able to recover majority costs and should breakeven on all fronts and with everything going smoothly might even see some profit in months / years to come.
From the four types (perfect competition, monopoly, oligopoly and monopolistic competition) of economic markets that we have studied perfect competition is the one where market forces are allowed to take their course and price and output determination is in line with the ongoing demand and supply. In this day and age the perfectly competitive market is the one for personal computers which compete against each other globally. There are various known brands competing against the unbranded unknown version while providing the same utility. Therefore there are niches in which these products operate and product in itself has become a generic one especially in developed and developing countries and to some extent even in under developed countries.
The buyers and sellers are plenty for this product because there are huge consumption patterns for branded, non-branded, new and even used computers and laptops in almost every economy around the globe. Since connectivity and internet is the key these days and almost no education or work related matter can be conducted without the presence of personal computers the need amongst the customer is pronounced. Therefore it is not so much about identifying buyers or sellers because buyers have the need and sellers are plenty because of the competition and bulk involved. It is more about making the buyers seek the quality in the product and price so as to attract them. Then it is also a matter of the timing, seasonal impact, the economic activity, the fiscal and monetary factors (Alm, Sennoga & Skidmore, 2009) influencing the economy / region in question.
This perfectly competitive global market place for personal computers / laptops is reflective of the true picture as exhibited in our studies. The product features are almost generic and there are plenty of buyers and sellers and there is massive opportunity. At the same time there would be regional, psychographic, behavioral patterns involved and companies might play around those detail. But overall market operated the limited niches.
In all fairness if the market is perfectly competitive that sellers should not be able to influence prices and must be price takers. But in this case considering the geographical influences and the immense size of the market unless and until you are a very strong brand (like IBM was once) you cannot set the price because customers / buyers will opt for the cheaper alternative. Then there is a factor of exchange rates as cross border trading is heavy. There are so many sellers that they cannot form cartels. But a slight bifurcation does exist where branded PC sellers compete against branded ones only and their prices are internationally regulated by parent companies while local / unbranded ones compete against each other in a normal manner. Therefore price setting is influenced and sellers are neither price takers nor price setters nor can they influence excess supply without knowing the actual demand.
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Therefore price based competition is highly unlikely given the market dynamics but sellers are likely to offer various services and after sale services in order to retain the customers and to attract them since the good in question is generally standardized. Since in modern day world almost every economy is a mixed economy with a fair bit of influence and regulations from government with the notion of taxes and imports and exports and that would be the case here as well. Government influence would always be there to protect their own industry (if applicable). The environment of competition is such that no one can entirely or even remotely influence the market because of sheer large number of players. This is what constitutes a clearly competitive market. Government provides the regulatory network and rest is managed purely on the basis of market and international factors such as exchange rates and global demands etc.