Your insurance firm processes claims, through its newer, larger, high-tech facility, and its older, smaller low-tech facility. Each month, the high-tech facility handles 10,000 claims, incurs $100,000 in fixed costs, and $100,000 in variable costs. Each month, the low-tech facility handles 2,000 claims, incurs $16,000 in fixed costs, and $24,000 in variable costs. If you anticipate a decrease in the number of claims, where will you lay off workers?

The answer is:

Lay-off workers in "low-tech facility" i.e. $12 per claim.

Explanation:

It is the cost, that the producer has to bear irrespective of the level of production.

It is the cost that alters with the changes with the changes in the production level.

The insurance firm has two facilities for claim process:

1: High-tech facility - new

2: Low-tech facility - old

Claims handled in a month = 10,000

Fixed costs = $100,000

Variable costs = $100,000

Claims handled in a month = 2,000

Fixed costs = $16,000

Variable costs = $24,000

The fixed costs have to be borne, because they are unavoidable, but the variable costs can be ignored.

In high-tech facility, average variable cost per claim = $100,000/10,000 = $10 per claim

In low-tech facility, average variable cost per claim = $24,000/2,000 = $12 per claim

If there is a decrease in the number of claims, the workers should be laid-off in low-tech facility, because variable cost per claim is higher in low-tech facility i.e. $12 per claim.

This will help in reducing the costs.

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