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Give an example of how a manager can increase variable costs while decreasing fixed costs.

Short Answer

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A manager can increase variable costs by increasing production volume, such as producing more units and hiring additional labor. To decrease fixed costs, the manager can reduce expenses not tied to production levels, like downsizing the production facility to pay lower rent, or renegotiating supplier contracts for lower fixed prices. For example, a clothing manufacturing company manager hires temporary workers to meet higher demand (increasing variable costs) and moves operations to a smaller facility with lower rent (decreasing fixed costs).
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Step 1: Increase Variable Costs

A manager can increase variable costs by increasing the volume of production. This could be done by producing more units of a product, requiring the company to use more raw materials, and hiring additional labor to meet the increased demand.

Step 2: Decrease Fixed Costs

To decrease fixed costs, the manager needs to identify areas where the business spends money on expenses that do not change with production levels and find ways to reduce these costs. One way to do this is by renting a smaller facility for the production process. By downsizing the facility, the manager can reduce the rent expense, which is a fixed cost. Alternatively, the manager can also renegotiate contracts with suppliers to lower fixed price agreements like insurance or equipment leases. Example:

Step 3: Scenario

Imagine a manager of a clothing manufacturing company who wants to increase production to meet higher demand for their products. To achieve this, the manager decides to hire additional temporary workers to help with the increased production. The additional labor cost is a variable cost because it is directly associated with the increase in production. At the same time, the manager realizes that the company's current facility is larger than necessary for the scale of production. They decide to move the operations to a smaller facility with a lower monthly rent, thereby decreasing the fixed cost for rent. By increasing variable costs (additional labor) and decreasing fixed costs (rent), the manager has achieved the desired goal.

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