You are the vice president of engineering for a large company. For the last several years the company has experienced lower sales and higher operating costs. Your budget (for all software engineering activities) has been cut by 5% each year for the last three years. To save money you have been cutting back on maintenance projects and testing activities. Given only this information, what is most likely to happen over time

Explanation:

Utilizing the information in the question;

(A) In the last several years, the company has experienced lower sales and higher operating costs

- this means that revenue (price × quantity of goods sold) is dropping

- costs of running machinery is rising

- This implies that Total Cost is rising while Total Revenue is falling. In other words, the profit gained by the firm is slimmer.

(B) Your budget for engineering activities has been cut by 5% each year, for the last 3 years

- A budget is a document which lays out proposed expenditure and expected income for a business period. If your budget has been slashed by 5% each year, it means that the funds given to you for expenditure sake, are reduced by 5 percent.

This leaves you less funds or money to do what you ought to do. It is a financial constraint.

(C) To save money, you've been cutting back on maintenance projects and testing activities

- As your budget is slashed each year, you rearrange your priorities on a scale of preference; such that the funds given to you are used for what you deem "most important". So from the information above, the least important items on your scale of preference are

- maintenance projects

&

- testing activities

The effect of this is that machinery will breakdown and work will be further slowed. There will be low production of goods, fewer amount of goods to put up for sale, and then lower revenue.

If the firm's Marginal Cost is still below its Marginal Revenue though, it has some leverage to devise means of generating more funds to run the firm.