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earnit
Joined: 06 Mar 2014
Last visit: 21 Dec 2016
Posts: 161
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Location: India
Schools: INSEAD Jan '16 Tepper '16 ISB '16 Simon '18 (A)
GMAT Date: 04-30-2015
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12 Nov 2014, 03:05
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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.”
In an annual report to stockholders of Olympic Foods, it is presented that Olympic Foods is well on its way to boost profits and the primary reason for that feat will be minimized costs. The author of the report provides a comparison with color film processing to support his claim. Further, it is assumed that an organization which is 25 year old has significant experience in the field that would make Olympic Foods more efficient because organizations learn how to do things better with time. This argument has been structured with weak premised and unsubstantiated assumptions.
The primary flaw in the report is an illogical comparison, used to support a claim that organizations get better with time, cut costs and hence be more profitable. The author makes an illogical comparison of a Food Processing Unit with that of a color film processing. The author fails to take into account that a comparison should be made between two logical entities with a similar nature of work. The author fails to take into account that the materials required by a color film processing may be completely different from that of a food processing unit. Further, the market that a film processing company caters to might be irrelevant to that of a food processing organization. The author provides an example of 3by5 inch color film that cost 50 cents for a 5 day service in 1970, costing 20 cents for a one day service in 1984. The author fails to conclude that in 1984 the service is completed in a day itself. And so indirectly suggesting that for a day basis the processing is actually costing 10 cents more than what it costs in 1970.
The author of the report draws a conclusion based on certain questionable assumptions that minimize costs accounts to maximized profits. The author fails to take into the account, the revenue from sales of the Food of Olympic Foods. There is a possibility that the section of the population that Olympic Food caters to develops a certain change in taste or a competitor sets up shop in the same area. All these factors could eventually reduce sales of Olympic Foods and thereby affecting the Profits. The author draws a conclusion of maximized profits based on certain factor, cutting costs, only.
The Argument, even though has certain gaps, that is not to say it is completely flawed. The argument can be improved by providing logical comparison between similar entities in order to establish a conclusion. Moreover, if the author provides evidence to substantiate that Revenue from sales is constant and that sales and no other factors are going prove hindrance to the profits, then the basis for conclusion is logical as now the primary factor is cutting costs.
As it stands, however, the argument is flawed for the reasons indicated above. The Stockholders would need more than the option of cutting costs as a driving factor towards enhancing profits for Olympic 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.”
In an annual report to stockholders of Olympic Foods, it is presented that Olympic Foods is well on its way to boost profits and the primary reason for that feat will be minimized costs. The author of the report provides a comparison with color film processing to support his claim. Further, it is assumed that an organization which is 25 year old has significant experience in the field that would make Olympic Foods more efficient because organizations learn how to do things better with time. This argument has been structured with weak premised and unsubstantiated assumptions.
The primary flaw in the report is an illogical comparison, used to support a claim that organizations get better with time, cut costs and hence be more profitable. The author makes an illogical comparison of a Food Processing Unit with that of a color film processing. The author fails to take into account that a comparison should be made between two logical entities with a similar nature of work. The author fails to take into account that the materials required by a color film processing may be completely different from that of a food processing unit. Further, the market that a film processing company caters to might be irrelevant to that of a food processing organization. The author provides an example of 3by5 inch color film that cost 50 cents for a 5 day service in 1970, costing 20 cents for a one day service in 1984. The author fails to conclude that in 1984 the service is completed in a day itself. And so indirectly suggesting that for a day basis the processing is actually costing 10 cents more than what it costs in 1970.
The author of the report draws a conclusion based on certain questionable assumptions that minimize costs accounts to maximized profits. The author fails to take into the account, the revenue from sales of the Food of Olympic Foods. There is a possibility that the section of the population that Olympic Food caters to develops a certain change in taste or a competitor sets up shop in the same area. All these factors could eventually reduce sales of Olympic Foods and thereby affecting the Profits. The author draws a conclusion of maximized profits based on certain factor, cutting costs, only.
The Argument, even though has certain gaps, that is not to say it is completely flawed. The argument can be improved by providing logical comparison between similar entities in order to establish a conclusion. Moreover, if the author provides evidence to substantiate that Revenue from sales is constant and that sales and no other factors are going prove hindrance to the profits, then the basis for conclusion is logical as now the primary factor is cutting costs.
As it stands, however, the argument is flawed for the reasons indicated above. The Stockholders would need more than the option of cutting costs as a driving factor towards enhancing profits for Olympic Foods.
earnit
Joined: 06 Mar 2014
Last visit: 21 Dec 2016
Posts: 161
Own Kudos:
Given Kudos: 84
Location: India
Schools: INSEAD Jan '16 Tepper '16 ISB '16 Simon '18 (A)
GMAT Date: 04-30-2015
Products:
17 Nov 2014, 02:52
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susanne
Susanne,
Thank you for such kind words.
Really appreciate it.
