Chapter 10, Problem 1DQ

List the types of costs incurred when employees are laid off. What costs are difficult to estimate in monetary terms? Suppose that a firm is facing a downturn in business, each employee has skills Valued at $40,000 per year, and it costs $100,000 to lay off an employee. If business is expected to improve in 1 year, are layoffs financially justified? What is the“payback” period for the layoff decision?

Summary Introduction

Interpretation: The types of costs that would be incurred when employees are laid off along with the type of cost that would be difficult to estimate in monetary terms and the payback period for the layoff decision are to be determined.

Concept Introduction:

Layoff refers to the temporary suspension and the permanent termination of the employee form an organization, for reasons apart from the employee’s actual performance.

Answer to Problem 1DQ

Final answer 2.5 years

Explanation of Solution

There are several types of layoff costs which are as follows:

1. Severance pays
Severance pays hasbeen given by the organization to the laid-off employees. Severance pay generally hasthree months.
2. Cost of interviews
Conducting interviews and firing candidates also results ina lot of paperwork and cost. This also causes wastage of time.
3. Cost of retraining the existing workers
When an employeeis fired, the remaining employee needs to be trained to do the work of fired employees.
4. Lost productivity
When an employee is fired, another employee has to learn the work of the fired employee to increase productivity with the new system.
5. Skills lost
When an experiencedemployee is fired, this results in a loss of knowledge and skills.
6. Effect on other employees
When an employee is fired, the moral and sense of insecurity arises in the other employees. Other employees start searching fora new job. To reduce this instability,an organization have to conduct meetings.

The intangible cost is difficult to be estimated in the monetary terms because it cannot be quantified or accurately estimated.

If an organization is expected to get better in one year, to layoffa cost of $100000 is not justified for a worker with askill value of $ 40,000. This is because the organization is spending $100000 to save the $40,000 which results in the loss of the $60,000 to the organization. Hence, from the financial point of view layoffs is not justified.

  $\begin{array}{l}\text{Payback period = }\frac{\text{Initially off cost}}{\text{Annual payment}}\\ =\frac{100000}{40000}\\ =\text{ 2}\text{.5 years }\end{array}$

Hence, the payback period is 2.5 years.