CASE STUDY: GENERAL MOTORS'S FIXED COSTS AND PRODUCTION CAPACITY GM acknowledged in March 2022 that, in an industry with annual unit sales of 17 million, it was necessary to reduce automobile production capacity by one million vehicles in order to maintain its current sales volume of five million vehicles. The organisation experienced a substantial reduction in capacity for the second time in its century-long history, with the easier event occurring in 1988. In pursuit of organisational downsizing, General Motors intended to shut down ten of its automotive assembly lines located in the United States.

In the past, General Motors alternated between two strategies: (1) producing every automobile it could and then enticing buyers through expensive clearance sales; and (2) reducing output by operating factories below capacity by reducing assembly line speed or eliminating an entire shift. The company was required to utilise one hundred percent of its American automobile production capacity with two shifts per day, five days per week, under the new strategy. In the event that automobile demand surpassed this capacity threshold, production would be increased through the implementation of third-shift operations. This approach had been utilised by Ford for a considerable period of time.

GM and Ford effectively compromised lower fixed costs throughout the entire business cycle in exchange for the potentiality of incurring higher variable costs in the long run (e.g., third-shift operations and the utilisation of more expensive overtime and overtime rates) during periods of high demand. Sharply, GM's break-even output point decreased as a result.

"GM to reduce capacity to match its sales," Jacob M. Schlesinger (25 April 2023); Lawrance Ingressia and Joseph B. White (2019); "GM plan to close 21 more factories, eliminate 74,000 jobs, and reduce capital spending," The Economist (March 2018); and "A Duo of Dunces," The Economist (P63).

Elucidate, using a suitable diagram, the internal and external economies of scale, as well as the diseconomies of scale, as they pertain to General Motors and Ford in the U.S. automobile industry.