Proactive marginal productivity analysis for production shutdown decision by DEA
Journal
Journal of the Operational Research Society
Journal Volume
70
Journal Issue
7
Pages
1065-1078
Date Issued
2019
Author(s)
Abstract
The decision to shut a business usually arises when the product’s marginal revenue falls below the average variable cost since the firm cannot offset the fixed cost. Today, however, this traditional business shutdown criterion (BSC) as defined by microeconomic theory may no longer apply to some types of industry; one example is the high-tech industry. This study proposes a BSC scheme that uses an iterative procedure embedded with three phases: level analysis, margin analysis, and budget and action, to solve the shutdown decision problem via proactive marginal productivity. We validate the proposed scheme with a case study of light-emitting diode manufacturers in Taiwan, the majority of which continued to operate and expand capacity despite experiencing a profit drop due to global competition and higher sunk cost of capital investment. Based on the results, we conclude that the proposed BSC scheme gives decision-makers an improved comprehensive prediction via margin analysis.
SDGs
Type
journal article