Step 1: Calculate the current annual wage bill for unionised staff.
Total Wage Bill = Number of employees × Average annual salary
Total Wage Bill = 200 × $40,000 = $8,000,000
Step 2: Calculate the annual cost of management's 2% offer.
Cost of 2% offer = Total Wage Bill × 2%
Cost of 2% offer = $8,000,000 × 0.02 = $160,000
Step 3: Calculate the annual cost of the union's 5% demand.
Cost of 5% demand = Total Wage Bill × 5%
Cost of 5% demand = $8,000,000 × 0.05 = $400,000
Step 4: Calculate the cost of the threatened 10-day strike.
Cost of Strike = Daily contribution lost × Number of strike days
Cost of Strike = $80,000 × 10 = $800,000
Step 5: Analysis and Advice
- Difference in pay offers: The annual difference between the union's demand and management's offer is $400,000 - $160,000 = $240,000.
- Comparison: The immediate cost of the 10-day strike ($800,000 in lost contribution) is more than three times the total annual difference between the two pay offers ($240,000).
- Advice: From a purely financial perspective, it is significantly cheaper for management to accept the union's 5% demand than to endure the 10-day strike. The cost of the strike would take over 3 years to be 'paid back' by the savings from a lower pay deal. This calculation doesn't even include non-financial costs like damage to customer relations, loss of future orders, and poor employee morale. Management should seek to negotiate a settlement, possibly by agreeing to the 5% rise or a figure close to it, perhaps in return for productivity improvements.