An internal study at a manufacturer of low-end photocopiers revealed that each of its workers assembles 3 photocopiers per hour and is paid $6 for each assembled copier. Although the company does not have the resources needed to supervise the workers, a full-time inspector verifies the quality of each unit produced before a worker is paid for his/her output. Assume that you have been asked by your superior to evaluate a new proposal designed to cut costs. Under this plan, workers would be paid a fixed wage of $16 per hour.
Would you recommend this plan to the manufacturer? Substantiate your answer.
Solution
From the information given, we know that workers working in a low-end photocopier manufacturing company assemble around 3 units of photocopiers in an hour (for each assembly they are paid $6). However, they are paid when the quality-inspector (full-time) verifies the quality of the machines that are assembled in that manufacturing unit. It implies that each worker earns around $18 for one hour of work, as a worker is assembling three units (photocopiers) every hour.
THE PROPOSAL
It has been proposed that instead of paying a worker for each assembly of the photocopier, the firm should pay him/her fixed wage of $16. This new wage, which is fixed, aims to cut down the cost by $2 for each worker (firm will be paying $2 less to every worker). This new wage policy will cut the cost; however, it may affect the quality and quantity for instance, when workers know that they will be paid $16 for one hour (whether they assemble three units or zero), the production volume may adversely get affected. It is because to earn $16 they are not bound to assemble a particular number of photocopiers. Currently, they are assembling three units per hour, as they know that would be paid for each assembly (probably working at their maximum capacity).
Similarly, the fixed wage may cause issues about quality. It is because workers would not be bound to produce high-quality work, as they would be entitled to a fixed wage irrespective of the quality of their work. For these particular reasons, this proposal or plan to pay a fixed wage to the workers may affect the overall performance of workers and company adversely. The new attitude of workers, which may develop after the implementation of the new policy, can be understood with the help of the economic concept of incentives; workers do not have any incentive anymore to assemble three units of photocopiers (Stengel).
Work Cited
Stengel, Donald N. Managerial Economics: Concepts and Principles. 1. Business Expert Press, 2011.
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