Question

As manager of a division responsible for both production and sales of products...and, hence, division profits, you are looking for ways to leverage the profits of your division to a higher level. You are considering changing your cost structure to include more fixed costs and less variable costs by automating some of the production activities currently performed by people.

What are some of the considerations that you should keep in mind as you ponder this decision?

Answer 1

The first and only thing to consider in this case is that, as you are going to increase fixed expenses. You should consider the drawbacks of fixed costs.

That is, even if there is no production the fixed costs would be incurred which will have an adverse impact. And also if the business is shut you will still have to incur fixed expenses.

But as a production manager you need not bother about this things which is the issue of top management. But thinking about company as a whole it is not a good idea to increase fixed expenses. Variable costs and fixed costs should always be in a ratio which is beneficial to the company.