Suppose that ABC Company operates in a tiny, rural and remote community, within Newfoundland Labrador, in a region with a weak economy, and is the biggest local employer.

ABC Company employs 150 full-time, non-union production workers, all at a little under $500/week (or $25,000) per year, and all do the same monotonous production task. These workers earn about $1.00 per hour above minimum wage. ABC has analyzed the situation, and determined that paying slightly above minimum wage helps with retention, motivation levels, and ensures that there is always a pool of keen, qualified applicants if hiring is required. These 150 workers receive only minimal benefits from ABC, and do not have a company pension plan. This total remuneration package might sound low, but is actually somewhat higher than other plants in the area, and for many other jobs in the area. ABC Company had annual sales of about 1,500,000 widgets at about $3.00/each. Thus, each production worker is capable of generating 10,000 widgets annually. Since the five executives (i.e. Production Manager, Human Resource Manager, Administration Manager, Marketing Manager, and General Manager) of the company earn a total of $300,000 per year, fixed costs are $100,000 and property taxes are $100,000 per year, the ABC Company has averaged about $250,000 per year in profits for the past few years. ABC Company is owned equally by the five executives, who each have a significant capital investment in this private enterprise. As an aside, raw material costs and other inputs and other taxes and fees are minimal!     

Annual results, for the past couple years:

Revenue: (1,500,000 x $3.00)                                                    $4,500,000

Production worker wages (150 x $25,000)                                3,750,000               

Executive salaries/property taxes/fixed costs                               500,000

Profit:                                                                                                 $250,000

New Information:

Wage and price inflation are essentially non-existent is today's very weak economic environment.   However, a major overseas competitor, producing in a country with far cheaper labor, has just implemented a new product that is cheaper and technologically superior to the widgets made by the ABC Company. The production workers and management all know that ABC's sales will likely fall to about 1,250,000 widgets at $3.00/each, for at least 2021 and 2022. That is, revenues and sales volumes are certain to fall by about 1/6 immediately, and remain at that lower level for the next two years.

Forecast, for the 2021 calendar year, and 2022 calendar year, if no action is taken:

Revenue: (1,250,000 x $3.00):                                                    $3,750,000

Production worker wages (150 x $25,000)                                3,750,000               

Executive salaries/property taxes/fixed costs                               500,000

Loss:                                                                                                  $500,000

Question 2: 

Suppose that ABC's executives decide to consult the local mayor. Provide a specific "solution" that the mayor might logically suggest that ABC should do for the next two years, AND briefly explain why. What is the solution supposed to achieve? As part of your answer, please make sure to describe the IR perspective that the mayor is likely to have.

Answer rating: 100% (QA)

Quiz 1 There are several possible actions that the ABC Company might take in order to reduce losses and return to profitability One option might be to ... View the full answer