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EastWind [94]
3 years ago
12

Your insurance firm processes claims, through its newer, larger, high-tech facility, and its older, smaller low-tech facility. E

ach month, the high-tech facility handles 10,000 claims, incurs $100,000 in fixed costs, and $100,000 in variable costs. Each month, the low-tech facility handles 2,000 claims, incurs $16,000 in fixed costs, and $24,000 in variable costs. If you anticipate a decrease in the number of claims, where will you lay off workers?
Business
1 answer:
Arte-miy333 [17]3 years ago
8 0

Answer:

The answer is:

Lay-off workers in "low-tech facility" i.e. $12 per claim.

Explanation:

<h2>Step 1:</h2><h3>The total fixed cost:</h3>

It is the cost, that the producer has to bear irrespective of the level of production.

<h3>Total variable cost:</h3>

It is the cost that alters with the changes with the changes in the production level.

<h2>Step 2:</h2>

The insurance firm has two facilities for claim process:

1: High-tech facility - new

2: Low-tech facility - old

<h3>High-tech facility:</h3>

Claims handled in a month = 10,000

Fixed costs = $100,000

Variable costs = $100,000

<h3>Low-tech facility:</h3>

Claims handled in a month = 2,000

Fixed costs = $16,000

Variable costs = $24,000

<h2>Step 3:</h2>

The fixed costs have to be borne, because they are unavoidable, but the variable costs can be ignored.

In high-tech facility, average variable cost per claim = $100,000/10,000 = $10 per claim

In low-tech facility, average variable cost per claim = $24,000/2,000 = $12 per claim

<h2>Step 4:</h2><h3>Conclusion:</h3>

If there is a decrease in the number of claims, the workers should be laid-off in low-tech facility, because variable cost per claim is higher in low-tech facility i.e. $12 per claim.

This will help in reducing the costs.

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