Evaluation of a Company

1. Should the company close? Why or why not? According to the information provided in the case study, this company has 450,000 pesos a month in fixed costs. The company generates revenues of only 200,000 pesos a month by producing 5,000 pairs of shoes. Therefore, this firm is losing 250,000 pesos a month. This firm has only two options; it can correct the problem resulting in the loss or it can go out of business either voluntarily or as a result of an involuntary bankruptcy filing.

Before closing this manufacturing facility, management should consider other options recognizing that certain fixed costs will continue even when no output is produced. One option to consider is to try to increase the price of the shoes. Another is to consider options to lower expenses. It seems likely that a solution will come in the form of greater utilization of the company's assets. For example, the company could sublease part of the plant, or this firm could become a contract manufacturer for another firm as a way to increase revenues without increasing the assets in use.

Other options and alternatives to consider include selling the business to a third party that is capable of utilizing the assets of the company more efficiently.

B. What are the long term prospects for this company? The long term prospects for the company are not good. The main problem appears to be the firm's high fixed costs as well as the high cost of labor relative to the sale price of the shoes it manu

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t for a competitor to enter the marketplace. Another way is for the bakery not to get too greedy. The higher the profits generated, the more attractive the industry becomes to other firms. Another way to discourage competition is to produce the type and quantity of products consumers demand. 5. Do monopolies exist, and can they generate additional revenues by charging different prices in different markets? The answer to both questions is yes. There are few sustained monopolies in the United States. Microsoft has been accused of being a monopoly. Such firms are usually closely watched by state and federal agencies and can be charged with violation of state or federal antitrust regulations. If a monopoly is producing at an output level at which its marginal revenue exceeds its marginal cost, in order to increase its profit it can lower its price and increase output. In other words, a company such as Microsoft can increase revenues by charging different prices to different groups of customers. Here is a simple example: Assume that an operating system sells for $100 and that the incremental cost to produce one additional unit is $10. Assume there are potential customers that cannot afford $100. Microsoft can either charge a lowe

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