Over time, the costs of processing go down because as organizations l

Prompt

The following appeared as part of an annual report sent to stockholders by Olympic Foods, a processor of frozen
foods:

“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.”

Response

Olympic Foods report makes the comparison that, since they’ve been in the industry for 25 years, they will have become the most efficient they’ve been up to that point which will reduce their costs and maximize their profits. This argument contains a number of assumptions that make the argument flawed. The report uses a false analogy between their industry and the color film processing industry, they confuse correlation with causation, and provide insufficient information regarding their total costs of production which give weak evidence to support the conclusion that their profits will be maximized.

First, they use the cost reduction of color film processing from 1970-1987 as an example to indicate that as time went on, their costs fell due to the increase in efficiency the company had because they got better at processing color film as the years went on. This could be the case but it doesn’t mean that it is the case for all types of processing companies. It could be that Olympic Foods is already operating at peak efficiency and therefore will not increase its efficiency this year as compared to previous years.

Second, the report confuses correlation with causation by assuming that the only or major reason why the cost of color film processing decreased is because the organizations learned to do it better. It may as well be a factor but another factor could be that the technology for color processing improved or that the costs of materials decreased significantly which would also have a big effect on cost.

Lastly, Olympic Foods fails to mention if processing is their biggest cost. It could be that their efficiency will increase and therefore decrease their processing costs, but if processing is not their biggest cost and some of their other costs increased then their profits would ultimately decrease, assuming that revenues remain constant.

To conclude, by comparing themselves with a historical change in a possibly unrelated industry, assuming a single cause for the cost reduction in that industry, and failing to disclose more information about their costs, Olympic Foods reaches the conclusion that their costs will be minimized and their profits maximized based on incomplete and faulty information that causes their argument to be flawed.