Huxley Maquiladora Essay

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CHAPTER 5: COST THEORY Overview of Huxley Maquiladora Huxley Manufacturing Company, a large firm in the defense industry, is considering a strategic move to shift production from its California plant to Mexico. Tariff reductions made possible by the North American Free Trade Agreement (NAFTA) opened up the potential to enjoy significant cost savings by shifting production south of the Mexican border. Huxley is considering three options. The simplest option is to negotiate a subcontracting arrangement in which a Mexican firm manufactures steering column components (SCCs) according to the specifications of Huxley. The subcontracting firm would then be paid by Huxley on a per-piece arrangement. A subcontracting arrangement would…show more content…
Production Theory and Cost Theory In the previous chapter, we discussed the economic theory of production. Comprehending production theory (the relationship between inputs and output) is a necessary prerequisite to understanding cost theory (the relationship between production and costs). As we noted in the previous chapter, costs are derived from production activities. As worker productivity increases, for example, unit costs decrease. The relationship between productivity and cost was implied in the Huxley case. Most of the employees at Huxley’s San Diego plant were women. The plant experienced high employee turnover because working with metals was a dirty job. The Huxley Maquila Project Report suggested that young Mexican women might be more productive than their American counterparts because they would be more patient. Hence, even if the going wage rate south of the border was identical to that paid in San Diego, unit costs would be lower due to the increased productivity at a Mexican facility. As you may recall from the chapter on production theory, in the early stages of production, a firm is expected to encounter increasing marginal product. As inputs are used for production, they become more specialized and the resulting efficiency gains cause production to increase more than proportionately. For example, suppose one worker was capable of producing one unit/hour. By adding a second worker, each worker

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