Question

Your insurance firm processes claims through its two facilities: facility A and facility B. Each month, facility A handles 9,000 claims and incurs in $162,000 fixed costs and $180,000 in variable costs. Each month, facility B handles 11,000 and incurs $95,000 in fixed costs and $143,000 in variable costs.
Required:
If you anticipate a decrease in the number of claims, where will you lay off workers?

Answer 1

Answer:

We will lay off workers from Facility A

Explanation:

To determine the workers lay off we need to calculate the variable cost per claim using the following formula

Variable cost per claim = Total Variable cost / Numbers of claims

Facility A

Variable cost per claim = $180,000 / 9,000 claims = $20 per claim

Facility B

Variable cost per claim = $143,000 / 11,000 claims = $13 per claim

As we see that the facility B has the lower variable cost per claim so, we should lay off the workers from facility A because it has a higher variable cost in order to reduce the overall cost.