Production Cost Analysis: Singapore Factory Shutdown Decision

This report provides an analysis of production costs, focusing on the economic factors influencing the decision of the Meetoo Company to potentially shut down its Singapore factory. The analysis includes a discussion of average fixed and variable costs, the concept of a shutdown point, and the impact of selling price on profitability. The report examines both short-run and long-run considerations, and how environmental and economic factors, such as government regulations, competition, and management issues, influence the decision-making process. The report suggests that while shutting down the factory might be economically appropriate in the long run, the company should continue production in the short run. The report emphasizes the importance of considering various factors before making a decision to close a factory. The document concludes with a diagram illustrating the shut-down point of a firm.

Running head: ANALYSIS OF PRODUCTION COST
Analysis of Production Cost
Name of the University
Name of the Student
Author Note

1ANALYSIS OF PRODUCTION COST
a)
In a production process, there are chiefly two types of costs. These are average fixed
costs (AFC) and average variable costs (AVC). The amount of variable costs varies as the
production process will continue its production system (Salas-Molina et al. 2017). On the
other hand, the fixed cost remains constant for a particular time (Porter and Heppelmann
2014). If a company stops its production process, the variable cost will be zero. However,
the fixed cost cannot be zero and the producer will have to bear this cost for a particular
time being. However, this situation happens in the short-run. The total production cost of
a company includes both average variable costs and average fixed costs. Hence, to take
any decision regarding the cost structure of a company, these two costs should be
considered with equal importance.
The selling price of each shirt is £15. However, the cost price is £18. The average
fixed cost is £4 and the average variable cost is £14. Hence, from this cost structure, it can
be said that the company should further produce shirts. As the selling price of each shirt is
greater than its average variable cost, the company can bear the whole variable cost of the
production. Moreover, after paying variable costs, the company will have £ (15-14) = £1
as excess. By this amount, the company can compensate a small portion of its fixed cost.
The remaining portion of fixed cost will be paid by the producer from his or her income.
The amount of remaining fixed cost will be £ (4-1) = £3.
On the other hand, if the company will close its factory then there will be some other
effects. The decision of Mike Smart to shut the factory will adversely affect this Meetoo
Company. When the company will shut its Singapore factory, the production process will
be stopped. Hence, no shirt will be produced and the company will further loose the
opportunity to sell its shirt in the market. As a result, the company will not receive any

2ANALYSIS OF PRODUCTION COST
revenue. However, the fixed cost and variable cost of this production process will remain
same, for a fixed time. As the company will not earn any revenue, these costs will be paid
by the producers from their own profits. This total amount of cost, which the producer
will bear, is £18. However, this is not desirable for any producer.
Hence, it will be beneficial for this company to continue its production process. As £3
is less than £18, the producer of the Meetoo Company will get advantage by continuing
its production process. Hence, Mike Smart’s advice to shut the Singapore factory is not
economically appropriate.
On the other hand, the advice of Smart will be economically appropriate if the selling
price of each shirt will be less than its average variable cost. In this situation, the producer
will not bear its average variable cost and average fixed cost. Furthermore, the amount of
variable cost will remain same if this production system will continue. Hence, it will be
better to shut this factory and to stop the production process of shirts. In this situation, the
advice of Mike Smith will be applicable. When a producer cannot bear its minimum
average variable cost, then this company will reach at its shut-down point. Above this
shut-down point, a company should continue its production process. However, at this
point, the company should stop producing its output, as it cannot bear its average variable
cost and average fixed cost. This can be explained by an appropriate diagram.

3ANALYSIS OF PRODUCTION COST
AC
AVC
MC
AFC
Cost
QuantityO
Shut-down point
Fig 1: Shut-down point of a firm
Source: (created by author)
The shut-down point of a firm is shown in the above diagram (Vidaillet and Gamot
2015). Here, the minimum point of an average variable cost is shown in the above diagram.
As the company is operating above its shut-down point, it will be good for this Meetoo
Company to continue its production in the Singapore factory (Novák and Popesko 2014).
However, this will have some negative impacts and negative risk assessment on this
company.
In the long-run, a company will have only variable costs. Hence, it can gradually stop
its production process. In a long-run, a company will have enough time to gradually close its
factory. Hence, any factor of production will not be negatively affected to a large extent.
Moreover, it will not affect this company negatively (Peters, Roberts, Vuong and Fryges
2017). The Meetoo Company can gradually reduce its labor force. Moreover, it will have
enough time to sell its capital, like machineries, to other companies. Hence, the amount of

4ANALYSIS OF PRODUCTION COST
both variable costs and fixed costs will be reduced over time. In this situation, the amount of
negative risk assessment will be low, as well. Hence, the company will have enough time to
close its factory without any negative impacts. In this situation, the decision of Mike Smart
will be correct during the long-run.
b)
There are some other factors, which should be analyzed before taking any decision to
close a factory. This is because; a production process is not only based on any particular
factor. As it is a long-term process and many factors are employed over here, it is very
difficult to take a decision regarding the shut-down process of a factory. Hence, before taking
any steps, some other factors should be analyzed. Except the cost structure of production,
those factors have a great influence on this Meetoo Company. Therefore, the board members
of this company will gather some other environmental, economical and political information
of Singapore, before reaching to this decision. Under environmental factors environmental
regulations, requirement of compliance and waste management will be discussed. Moreover,
under the economical factor, low level of profit, high level of competition, problems
regarding good management, production process, resource problem and raw materials will be
discussed.
Natural Environmental Factors:
Regulations regarding Environment:
The government of a country takes some regulations to protect the environment of
that country. A company should meet certain standard at the time of production. This will
help the company to decrease any adverse effects on environment, at the time of production.
When a company creates excess amount of pollution, negative externality is created (He

5ANALYSIS OF PRODUCTION COST
2014). The government of this country can impose a tax or charge fine for this. As a result,
the company will bear some extra costs, except fixed and variable costs. Moreover, use of
harmful raw materials may create negative externalities. This negative externality creates
excess cost burden for a company.
In the Meetoo Company’s factory of Singapore, this situation can be occurred. This
factory may create excess amount of pollution. If the government of Singapore charges extra
amount on this company for creating pollution, the company can shut its factory in the short-
run. As this external cost will increase the total cost of the company, it will be better for
Meetoo to close this factory in Singapore. For different countries, the government regulation
will be different. Hence, the cost pattern will be different for these negative externalities. In
Singapore, this may be high and for this reason, the company can close its factory.
Requirement of Compliance:
There are some natural environmental factors that affect a business to operate
efficiently. Moreover, at every stage of production, the company should follow some
regulations regarding environment. Companies with high level of noncompliance have risk to
shut its company for a permanent basis. For the factory of Singapore, this noncompliance
may be high and that will adversely affect the company.
Waste Management:
In a production process, some waste materials are generated. Those waste materials
are harmful for an environment. Waste can be generated either in solid or liquid form.
Moreover, some wastes can also be generated in the form of gas. For every form of waste,
disposal process is different (Ma, Yin and Liu 2017). However, waste disposal is essential, as
create environmental pollution. Hence, producing output with huge amount with hazardous

6ANALYSIS OF PRODUCTION COST
raw materials is not good. It implies that the company is not operating its production process
efficiently. The government may impose tax or charge fine if the company creates huge
amount of waste. This will increase the total cost level of producer. Hence, it is essential for
to Meetoo Company to manage its waste in Singapore. Otherwise, the government of
Singapore may impose tax on this factory.
Economical Factors:
Economical conditions are the chief reason for shutting down a factory. If the country
is facing higher level of inflation or deflation for a long time, then it will be harmful for any
business activity (Rivoli 2014). On the other hand, low level of national income also effects a
business organization, directly. In Singapore, the level of inflation was very high for last few
years. This may be a reason to shut the factory.
Low level of profit:
The Meetoo Company has other factories except Singapore. In Singapore, it incurs
loss by selling its shirt at a lower price than its production cost. It is important to find out the
profit level of all other factories of this company. If the overall profit level of this company is
low, then the producer will get lower level of income. In this situation, it will be better for
this company to shut its Singapore factory in near future. However, at present, the company
should continue its production process in this factory. It will reduce its extra burden of cost.
Hence, in short-run, the company cannot close its factory immediately.
However, by selling its fixed factors and assets and by reducing its labor force, the company
can close its factory in long-run.

7ANALYSIS OF PRODUCTION COST
High level of competition:
In today’s world, the level of competition for each company has increased
significantly. Due to globalization, every business organization faces a strong competition in
domestic market and in international market.
The Meetoo Company operates its business in a monopolistic competitive market.
Hence, this company has large number of competitors, who produce shirts. In Singapore, this
company may not competitive with other domestic and international companies. This may
happen due to some factors (Balachander, Gal-Or, Geylani and Kim 2017). Citizens of
Singapore may not have enough demand for those shirts of Meetoo. As the demand is low, it
will be economically irrelevant to continue the production process in Singapore. Due to low
level of demand, the company is selling its products by incurring loss. In Singapore, the
market condition is very strong and competitive. Moreover, under this market condition, the
company will have to bear advertisement cost. To promote their products and to increase the
demand for their shirts, advertisement cost is essential. However, this advertisement cost
increases the total cost amount of this company. Hence, the company will reduce its
advertisement cost and as a result, the demand for shirts will be decreased.
Management problem:
Management is an essential part of a company. It helps this company to operate its
production process efficiently. Moreover, it also helps a company to take correct business
decision. However, a weak management body may hamper the production process.
The Meetoo Company may not have a strong management body. Within a company, a
strong managerial structure will help to earn extra profits. It also helps the company to
increase the demand for its product. However, in this Meetoo Company, the management

8ANALYSIS OF PRODUCTION COST
structure may not be strong. For this reason, the company is selling its product at a price,
which is lower than its cost price (Lin, MacMinn, Tian and Yu, 2017). Due to this weak
management structure, the company may close its factory in Singapore. Without considering
any economical affect, the management can take the decision to shut this factory. However, a
strong management body will continue its production process in short-run by considering all
economic impacts.
Production Process:
Along with a good management system, a good production process is also required.
By a good and efficient production process, a company can produce large number of outputs
with lower cost. For this good production process, a well-developed technology and a good
strategic plan are also required. However, due to geographical differences, this production
process also differs. Hence, the board of Meetoo Company should consider this production
process.
Resource problem:
To produce a product, a company needs four types of factors. These are land, capital,
labor and organization. Each and every factor is very important. Moreover, a good
technological innovation is also required. However, in Singapore, the cost of any one factor
or all factors may be high (Kosacka and Werner-Lewandowska 2017). That will increase the
total production cost of shirts. However, the company cannot sell its product at a higher price
due to high level of competition. Hence, it will be fruitful for this company to shut its factory
in Singapore.

9ANALYSIS OF PRODUCTION COST
Raw Materials:
To produce a shirt, the chief raw material is fabric. This fabric is made from natural
fibers. These natural fibers are linen, wool and cotton and so on. The availability of this raw
material is very important (van der Velden, Patel and Vogtländer 2014). Moreover, the price
of raw material is also important. Hence, the head of Meetoo Company should observe this
availability. If raw material is not easily available and price of fabric is high, then further
production will be stopped.
Political factor:
The political condition of a county also has a great influence on the production
process of a company. If political condition is not stable, then this may adversely affect this
company (Kotabe, Jiang and Murray 2017). Political disturbance cannot help a company to
develop its business. Hence, to close a factory in Singapore, the political condition of this
country should be considered.
However, in Singapore, the political condition is stable. This island is helpful for
every business organization to grow their business. Hence, in this context, this political factor
will not be affective. However, any political disturbance in near future will hamper the
production process of Meetoo Company.
Hence, from this above analysis a conclusion can be drawn. It can be said that there
are various factors, which are also very important for a business organisation. These factors
have a great influence on a company to take decision. These important factors are chiefly
based on environmental, economical and political conditions of a country. Other than cost
structure, those factors influence a company to take business decision (Leonidou,
Christodoulides, Kyrgidou and Palihawadana 2017). Therefore, before taking any decision,

10ANALYSIS OF PRODUCTION COST
the Meetoo Company will consider those factors. After analyzing those affects, the company
will either close its factory or will continue its production.
c)
Risk assessment determines both quantitative and qualitative risks of a company,
related to a particular situation. Quantitative risk assessment needs two components to
measure its risks factors (Song, Chan and Wright 2017). These two components are the
probability of loss that will occur and the potential loss. As the Meetoo Company may shut
its factory in Singapore, it will have some negative risk assessment. Hence, the company
should prepare a risk assessment program before closing their factory in Singapore. These
risks will be raised from its labor force, capital investment, and profit level of the company.
In Singapore, the company has hired many skilled and unskilled labors to produce
shirts. When they will close their factory, those labors will be unemployed. As Meetoo is a
U.S based company, it will have its other factories in U.S or in other countries. But in
Singapore, it has only one factory. Hence, those workers do not have any other option to
move. They will be jobless. Hence, the company should give them a fixed amount of money.
The company also has hired other factors of production except labor force. These are
land and capital. Those two factors will also be unemployed when the company will close its
factory. The company will bear a certain risk for this.
Moreover, there are some other external factors, which can adversely affect this
company for taking any decision. High level of competition of other firms, risks and
uncertainty are included in this external risk assessment of this company.
Hence, the Meetoo Company will prepare a risk assessment program to overcome
this. At first, they will identify those risks, which will occur after closing the factory.

11ANALYSIS OF PRODUCTION COST
Secondly, the company will quantify those risks according to their effects on business.
Thirdly, the company will form proper strategies to control those risks. Fourthly, the Meetoo
Company will implement those strategies for reducing risk. Lastly, after implementing those
strategies, the company will observe those risks factors continuously. The company will do
this to see that whether those risk assessment factors will further affect the company or not.
Hence, a proper risk assessment program should be arranged. This risk assessment program is
shown in the table below.
Risk that need to be analyzed:
Types of risk Classification of risk
Funds with high cost Financial
Inefficient customer service Customer
Competition External
Employer attraction Employee
Regulatory risk External
Non-implemented planed strategy management
The company should classify its risk assessment properly before taking any decision.
By evaluating its risk factor, the factory can perform efficiently and strongly in near future.