Question

Many equipment replacement or outsourcing decisions have relevant qualitative considerations, which may impact the acceptance of a quantitative evaluation, regardless of the calculated outcome. For instance, Steve Smith has completed an analysis of budgeted volumes for the U.S. division of Swiss Chocolate Company for the coming year, and noted that the firm’s direct labor cost of production is significantly less per unit than its Swiss affiliate plant, but is higher than its Mexican affiliate plant. The Swiss corporate office has indicated that if its costs are not competitive with the Mexican plant, closure of the U.S. plant is imminent. Rick White has proposed a plan for automation of some of the processes, which are now completed by hand at the U.S. division. Although the expected results are attractive, five of 10, or half of the production staff, would be terminated. Consider the ethical implications of such a decision. Would the replacement of the equipment be optimal? What might the impacts be to the workforce? Would there be potential impacts on financial results that extend beyond the immediate savings proposed in the equipment replacement?

Answer 1

First of all, let us understand the ethical implications of employee layoffs.

In today's challeniging markets, layoffs are a common strategy to reduce the cost of business. Executives and managers sometimes feel as if they have few other options. But layoffs can have a serious impact on the remaining employees and the idled workforce. There are also ethical implications in the layoff decision that reflect, at the core, corporate culture and values. We all know that every business had 4 sources of capital, Machine, Man, Money and Material. Laying off the employees can have deep impact on the other 3 sources of capital.

However, many organisations take such informed decision to layoff employees under the supervision of their committee and trade union.

Here, instead of laying off the employees, management can consider to replace the equipment. Old equipments effeciency is less, also it has a lot of maintenance cost. New equipment will be far more efficient than the old equipment. This will help to reduce the cost of production because per day production will be higher at the same cost.

With the equipment replacement decision, there can be long term financial impacts:-

1) In the long term, with overall reduction in the cost of production, company can afford to increase the production if they are having existing capacity.

2) With the reduced cost of production, company can afford to reduce the cost of product and attract more customers and thereby increasing their overall profitability.

3) With the increase in the overall profitability, income per share will increase and this will increase the trust of its stakeholders.

So, it is optimal to replace the equipment.