How Wage & Production Costs Shaped Chrysler’s Decision to Increase Shifts
Chrysler’s decision to increase production by having three shifts of up to 21 hours each day is certainly a bold one. The reason for this is that while it could, potentially, pay off, there are numerous pitfalls along the way that the car manufacturer would have to navigate. An analysis of the decision reveals that it is quite likely to have been fueled by wage and production costs. One way that movements in its wage costs might have affected Chrysler’s decision relates to its effect on marginal cost. Simply put, the marginal cost of any input is the amount (dollar value) that each additional unit of the said input adds to the company’s total costs. Based on this definition, it stands to reason that each unit of additional labor has a marginal cost attached to it since labor is an input in the production process. Chrysler’s decision must, therefore, have been influenced by the marginal costs of labor.
If a firm can hire as many additional workers as it wants at a constant wage, then the Marginal Cost of Labor is the dollar value of the said wage. A firm typically hires as many additional workers as it can, at a constant wage, so long as it is profitable to do so. So long as the amount of revenue from each additional worker is still positive, Chrysler will continue to engage more employees, even creating other shifts to accommodate them. That, in itself, poses a challenge. How can a firm know that adding more workers is still profitable? According to Samuleson & Marks (2012), firms can safely add more workers as long as the Marginal Cost of Labor (MCL) is lower than the additional revenue (MRPL). Chrysler must hit or come close to hitting the magic number with three shifts of employees working up to 21 hours each day. The risk with such an approach arises out of diminishing marginal returns. Labor’s marginal revenue product will eventually fall. At the point where the additional revenue for each employee added (MRPL) exactly matches the Marginal Cost of Labor (MCL), and beyond, increasing the labor force has no further benefit to the firm (Samuelson & Marks, 2012). In fact, a firm that disregards the point of inflection will veer into unprofitability.
Another, perhaps more important reason, is that by utilizing three continuous shifts, Chrysler can mitigate the rising costs of capital. Typically, engaging three batches of employees would have meant setting up three separate facilities. Each of the facilities would come at a substantial setup cost. Rather than incur the exorbitant cost, Chrysler might have chosen to have three shifts to eliminate some production costs. Doing so would mean that the company could utilize the excess production capacity at all of its plants, thus increasing production, and at minimal cost (Samuelson & Marks, 2012). It is possible for the motor vehicle company to institute the production change for its most popular, and profitable, vehicles like the minivans and Jeep Cherokee. Doing so would mean that they maximized the profit from the specific models and production lines. However, doing so also comes with some associated risks. Chief among these is that adopting such a high number of shifts would mean the company spreads itself too thin. Moreover, if demand for the models that are most profitable now changes, then the firm would have to incur the costs of repurposing their facilities to accommodate the shift in demand. As a final concern, having three shifts will leave very little time for servicing the production plants. Meaning that the firms could easily break down.
Samuelson, W., & Marks, S. G. (2012). Managerial Economics (7th ed). Hoboken, N.J: Wiley.
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