Economics in a Global Environment
The decision to continue operating a business at a loss is a hard one to make and there are many factors that need to be taken into account. With only the information given, it would make sense to stay open at least temporarily to see if another solution presents itself to increase revenue. This is because by staying open, the company still generates $1.5M per day.
70,000 employees at $100/employees = $7M costs
300,000 units produced at $30/unit = $9M revenue
+ variable input = $500,000 cost
This may not be enough to equalize the fixed costs (which are assumed to be more), but assuming that nothing will be gained by selling the fixed costs, this is still some revenue, as opposed to none. Thus staying open even for only a short period of time, even at a loss, will generate some revenue to offset the total losses at closure. Closing the company now will result in a loss of the costs of all fixed assets, however, staying open at a gain of $1.5M will decrease the amount lost when closed in the future.
However, if the company has been in business for some time, there are other options such as the possibility for tax breaks, workers’ compensations that need to be covered in the event of closure, money earned from selling or leasing fixed costs, etc. that might alleviate the situation.
The main thing is to do what is necessary to increase production while lowering costs which would increase revenue. Whether this is through lowering costs of manufacturing, hiring lower paid employees or demanding an increase in output, a business can not stay open for long if they continue to operate at a loss. Any means to bring the company to a point where they are at least breaking even needs to be taken. Maintaining the most profitable level of business is the goal of management and cutting losses whether immediately or gradually is also a way to increase revenue.
Goldman, A., & Sigismond, W. (2003). Business Law: Principles and Practices. Boston: Hough-ton Mifflin Company.
O’Sullivan, A., Perez, S., & Sheffrin, S. (2006). Economics: Principles, Applications, and Tools (5th Edition). Alexandria, VA: Prentice Hall.