The recession that started in 2008 produced a surprise for some manufacturers— t

Question

The recession that started in 2008 produced a surprise for some manufacturers— the number of jobs lost was actually lower than in previous recessions. Between 2000 and 2008 many factories adopted lean manufacturing practices that relied less on large numbers of low skilled workers, and more on machines and a few highly skilled workers. Because the employees are highly skilled, employers are reluctant to lose them.
Would you characterize labor costs as being a fixed cost, a variable cost, or something else in this situation?

Explanation / Answer

Labour costs are usually varible. But as per the given information when ever manufacturers started relying less on Low skilled labourers and relying more on machines and mechanised processes substituting the Low skilled labourers in their manufacturing proces the need arises only for a few highly skilled workers. In this situation the Machinery in combination of few highly skilled workers will substitute entire low skill labourers used in performing the same work.

In mechanised process of manufacturing a Fixed cost is incurred in the purchase of Machines and such custs are sunk costs and need not require additional funds unless the level of activity changes. Similarly, the high skilled workers hired for operation of such machniery and to perform some essential manual tasks were also fixed for a level of activity and undergoes change only if level of activity changes. Thus the High skilled labour costs are also a kind fixed in nature cost in the given context and there might be some situation where such labour costs behave as semi variable costs where in a fixed amount of workers are needed always but as level of activity increases additional workforce is hired to support increased level of activity. In that case labour costs are Semi variable in nature i.e, Fixed cost component and also variable cost component which varies with level of activity unlike the way of Labour costs where in they are of variable nature.

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