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The following appeared as part of an annual- Please Rate [#permalink]
23 Apr 2012, 21:31
The following appeared as part of an annual report sent to stockholders by Olympic Foods, a processor of frozen
“Over time, the costs of processing go down because as organizations learn how to do things better, they become
more efficient. In color film processing, for example, the cost of a 3-by-5-inch print fell from 50 cents for five-day
service in 1970 to 20 cents for one-day service in 1984. The same principle applies to the processing of food. And
since Olympic Foods will soon celebrate its 25th birthday, we can expect that our long experience will enable us to
minimize costs and thus maximize profits.”
The argument contends that we can expect Olympic Foods to maximize profits because their long experience will enable them to reduce costs. However, in arriving at such a conclusion, the argument supports a dubious assumption with a potentially spurious supporting example and makes additional questionable assumptions.
Firstly, the argument assumes that longevity enables corporations to become more efficient and thus minimize production costs. The argument provides one example, noting that the cost of 3-by-5-inch print for five-day service fell from 50 cents in 1970 to 20 cents for one-day service in 1984. Regardless of the veracity of the example, the example only references one product line of one industry and may have no relevance to the Food processing industry. For example, the cost of 3-by-5-inch print may have fallen due to a specific reason such as a decreased demand for the product, and, at the same time, various other product lines within the industry and most products from other industries may have risen in price. The potential for such a reality undermines both the use of the supporting example and the assumption that longevity enables corporations to become more efficient and lower costs. The argument could be strengthened by providing more general evidence that longevity enables corporations to minimize costs through increased efficiency.
Secondly, the argument assumes that after only 25 years, Olympic Foods can expect to have sufficient experience to minimize costs. Even if we grant the prior assumption that corporations develop more efficient processes over time and manage to lower costs, we cannot directly conclude that Olympic Foods’ 25 year history would allow sufficient time in order for the company to minimize costs. Due to constraints within the industry, relevant initiatives may take longer than 25 years to recognize, develop and implement. Therefore, Olympic Foods may not yet be able to realize cost minimization. The argument could be strengthened by providing evidence that cost minimization can be realized within this particular industry within a quarter century.
Finally, the argument implicitly assumes that minimization of costs implies maximization of profits. While Olympic Foods may successfully minimize costs, they may not have the appropriate market information in order to maximize revenues. For example, they may not accurately recognize the demand for various products and thus not equip their stores with the appropriate inventory. In such a case, regardless of cost minimization, Olympic Foods would not realize profit maximization due to a suboptimal level of revenues. The argument could be strengthened by providing evidence that Olympic Foods would be able to maximize their revenues.
Ultimately, the argument provides incomplete evidence and thus stands as unconvincing. In order to increase the potency of the argument, the author should provide more general evidence about the ability of companies to realize cost minimization, provide evidence that the cost minimization can be achieved within the first 25 years of a food processing company’s life and provide evidence that a 25 year old food processing company can realize not only cost minimization but also revenue maximization.