Efficiency and Cost of Production
The management team of AutoEdge is trying to weigh the advantages and disadvantages of leaving South Korea and reentering the United States. Sam Busch, the production manager of AutoEdge would the fixed and variable cost that AutoEdge will experience in South Korea and the United States, if the company chooses to conduct in either company. Sam Busch would also like the short run and the long run expenses of conducting business in the United States. After all the expenses, Sam Busch would to gain knowledge on the financial risks that AutoEdge faces if the production process, is relocated to the United States.
Fixed Costs and Variable cost
Fixed costs are ...view middle of the document...
The length of the time- frame establishes the short run or fixed cost clearly. Short run is a period of time where one factor is fixed and at least one factor is variable. Short run technically does not provide how long the period actually is. Short run could be few days, weeks or even years (Beggs, 2013). The fixed cost in the short run are considered sunk costs because the expenses are already paid and the company cannot receive a refund for the expenses. In the short run, a company can stop production or shut down but they cannot fully exit the market. An example of why a company, cannot fully exit the market is when a company has a lease on a building. If the company has a lease on a property or building, they are still obligated to pay the lease until the contract is over. The number of companies in the market are fixed, in the short run. The number is fixed because companies cannot easily enter or exit the market due to the fixed costs. Companies continue to produce products and output as long as the price, demand and sales cover the variable costs. In the short run, profits can either be positive, negative or zero.
Long run is the opposite of short run because all parts of the production process are variable after a specific period. The fixed costs of plants, equipment, property taxes and salaries become variable, when the production process, reaches a growth that requires the expenses to be reevaluate and expanded. In the long run all costs are variable (Beggs, 2013). The cost of salaries become variable when an employee receives a pay increase. The rent on a building can change when the contract is renewed.
AutoEdge manufacturing plant is currently in South Korea. Sam Busch the production manager of AutoEdge would like to understand the long and short run expenses AutoEdge would experience, if they stayed in South Korea. The first short run expense, AutoEdge would face is the lease or rent on their current building. A lease on the building is a contract that has a specific time- period. AutoEdge can relocate or move out of the building but they are obligated to pay rent until the contract ends. The second short run expense, AutoEdge may experience is property taxes. If AutoEdge is still renting the building, they are required to pay the taxes. If AutoEdge has contracts with salaried employees, they are still obligated to pay the employees their wages until the contract expires. Equipment is another short run expenses that AutoEdge has if they leave South Korea. If the equipment is leased, they must complete the contract. If AutoEdge owns the equipment, the equipment is a fixed expense until the equipment is sold. In the long -run, AutoEdge can adjust all fixed and variable costs. In the long- run, all costs are considered variable and all costs and expenses help exit the current market. The expenses South Korea will face in the long- run is building, labor and materials. The variable long run expenses are not...