Question

Your insurance firm processes claims through its two facilities: facility A and facility B. Each month, facility A handles 6,000 claims and incurs in $50,000 fixed costs and $54,000 in variable costs. Each month, facility B handles 5,000 and incurs $174,000 in fixed costs and $60,000 in variable costs. IF you anticipate a decrease in the number of claims, where will you lay off workers?

Answer 1

The Facility B will lay off the workers.

Step-by-step explanation:

For taking any decision, first we have to compute the variable cost per claim and fixed cost per claim

The variable cost per claim is equals to

= Total variable cost ÷ number of claims

For Facility A, the variable cost is equals to

= $54,000 ÷ 6,000 = $9 per claim

For Facility B, the variable cost is equals to

= $60,000 ÷ 5000 = $12 per claim

As fixed cost is remain same, so we don't have to compute the fixed cost because it is given in the question.

Since, in Facility B, the variable cost is $12 per claim and in Facility A, the variable cost is $9 per claim. So, the Facility B has greater variable cost per claim than Facility A, so the Facility B will lay off the workers if decrease in the number of claims happen.

Hence, Facility B will lay off the workers.