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Give an example of how a manager can decrease variable costs while increasing fixed costs.

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A manager can decrease variable costs while increasing fixed costs by investing in automation, such as an automated assembly line. This requires a significant upfront investment, resulting in higher fixed costs. However, the automated system can improve efficiency, reduce labor costs, and decrease waste, leading to lower variable costs. Overall, this strategy can potentially enhance the company's profit margin in the long run.
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Step 1: Decreasing Variable Costs

To decrease variable costs, the manager could consider optimizing the production process and improving efficiency. This may involve reducing waste, using materials more efficiently, or negotiating better deals with suppliers to lower the per-unit price of some production inputs. Additionally, the manager can look into automation or substituting a more expensive raw material with a cheaper alternative that achieves the same quality standards.

Step 2: Increasing Fixed Costs

Increasing fixed costs typically involves a larger upfront investment that should pay off over time by providing cost savings or other benefits. The manager could invest in new machinery or technology that speeds up the production process, reduces waste, or replaces some of the labor needed for a given rate of production. More advanced equipment may be more expensive to purchase and maintain, resulting in higher fixed costs. However, the improvement in productivity can lead to reduced variable costs and overall increased profitability.

Step 3: Example: Implementing Automation

A manager could invest in an automated assembly line for their manufacturing facility. This would involve a significant upfront investment to purchase, install, and maintain the machinery, resulting in higher fixed costs. However, the more efficient and precise production process would likely reduce labor costs, improve material usage, and decrease waste. As a result, the variable costs would decrease while fixed costs increase, which could ultimately improve the company's profit margin in the long run.

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