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 manufactures. If the owner of the firm can be persuaded to invest in capital equipment needed to reduce labor costs, the firm might be able to record a profit.
If I were the boss, I would be interested in ways to reduce uncertainty relating to the decisions that must be made. I would be concerned about the uncertainty associated with any additional investment. For example, uncertainty would be reduced if there was a clear indication of increased demand for th...