A firm has three different production facilities, all of which produce the same product ... While reviewing the firm's cost data, Jasmin, a manager, discovers that one of the plants has a higher average cost than the other plants and suggests closing that plant. Another manager, Joshua, notes that the high-cost plant has high fixed costs but that the marginal cost for that plant is lower than in the other plants. He says that the high-cost plant should not be shut down but should expand its operations. Who is right?

Question

Kylee Brooks

Business

7 May, 10:48

A firm has three different production facilities, all of which produce the same product ... While reviewing the firm's cost data, Jasmin, a manager, discovers that one of the plants has a higher average cost than the other plants and suggests closing that plant. Another manager, Joshua, notes that the high-cost plant has high fixed costs but that the marginal cost for that plant is lower than in the other plants. He says that the high-cost plant should not be shut down but should expand its operations. Who is right?

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Answers (1)

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Connor Clark · Answer 1

Joshua is right because fixed costs are unavoidable but marginal costs are not.

Explanation:

Decision making plays an important role while considering the development of the organization. The officials in the company should act smartly in making decisions during crucial situation.

Marginal cost is the cost added to the total cost while producing additional units. Fixed cost is the cost of the product that does not change with the increase or decrease in the quantity of the products.

In the above scenario, Jasmine and Joshua were discussing about the cost of the products that are produced in their manufacturing plants. They were discussing about the marginal cost and fixed cost.