Fixed Costs

The automotive industry is a highly competitive industry with many manufacturers fighting for a share of the large market. The industry has historically had a manufacturing capacity that has far exceeded the demand provided by the automobile market. The large manufacturing facilities that the companies operate out of have high fixed costs that must be managed successfully if the company wishes to make a profit. The automobile industry often has a hard time surviving harsh economic conditions because of the high fixed costs to operate their facilities. The manufactures are forced to lay off employees as the fixed costs to pay the employees continue as the demand for their vehicles has dropped. Automobile manufacturers were forced to lay off employees and eventually close plants as the economy took a hit in the recent recession. An example of this can be found when GM was closing plants in an effort to reduce their fixed costs per vehicle in an attempt to survive. The manufacturers in the automotive industry must successfully manage their fixed and variable costs in order to stay competitive in this tough industry.
Fixed costs that an automotive company endures may include rent, insurance, and equipment leasing. These costs often seem to be set in stone and the effort to lowering these costs seems difficult. The automotive companies rent the facilities that their vehicles are produced in from industrial real estate firms. Leasing these facilities from the real estate firms is a very expensive fixed cost that the company must pay every month or year. One way that the automotive manufacturers may minimize their fixed costs is to renegotiate their lease. The companies leasing the facilities from the firms have leverage in negotiation...

... middle of paper ...

... increasing revenue due to more sales and the small cost to perform oil changes on cars is minuscule in comparison.
In order for a company to maximize profit it is important to lower both variable and fixed costs while still producing a high quantity of output. This formula will lead companies down a path that will bring great success if successfully completed. Although fixed costs may seem to be hard to change, car manufacturers can use their leverage from extending leases to negotiate lower prices from industrial realty firms. The variable costs that a company incurs can also be reduced by utilizing the power of competition between suppliers in order to acquire parts at the lowest prices. After costs are minimized to the lowest possible rates it is up to management to create attractive buying programs and incentives to increase sales and revenue as a result.