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Learn what truly sets the UC Riverside MBA apart and how it helps in your professional growth
28 Feb 2015, 14:16
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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.”
Discuss how well reasoned . . . etc.
.....................................................................................................................................................................
The argument, that over time processing costs go down because organizations learn how to do things better is flawed in several ways. The author shows only one example of lowered costs of specific service and generalizes upon it. The example itself is not very convincing.
First, processing costs might go down over time for several reasons other than organizations learning and doing things better. The processing costs might decrease because the cost of raw material involved in processing might get lower or new technology, used in processing, might be far more efficient than the old one. The fact that the film processing cost decreased substantially from 1970 to 1984 might be the outcome of the reasons listed above, not the outcome of the organizations learning how to print the films. The cost of printing paper, for example, might have decreased in that period, or the new printers became available that used less energy and printing paint.
Second, the fact that the processing costs decrease in time in one industry, does not necessarily mean that they will decrease in another as the author of the passage claims.
Third, learning something and becoming more efficient in doing it is a continuous process. It does not happen in an instant. The fact that Olympic Food will soon celebrate its 25th birthday, does not mean that its food processing cost will decrease the moment that the celebration is over. On the contrary - if its costs have not decreased for over 25 years, it is unlikely that they will for the near future.
Finally, in the last sentence the author states, that by minimizing the costs the company will maximize the profits. It is not logical to suggest, that minimizing costs lead to maximizing profits - the company can virtually eliminate all the costs by going out of business, but this does not mean that the organization will maximize its profits. Cost minimization does not lead to profit maximization, cost optimization does.
The passage would have been much more convincing if it addressed all the issues listed above. I do not think that it is sound or logical as it is currently presented.
“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.”
Discuss how well reasoned . . . etc.
.....................................................................................................................................................................
The argument, that over time processing costs go down because organizations learn how to do things better is flawed in several ways. The author shows only one example of lowered costs of specific service and generalizes upon it. The example itself is not very convincing.
First, processing costs might go down over time for several reasons other than organizations learning and doing things better. The processing costs might decrease because the cost of raw material involved in processing might get lower or new technology, used in processing, might be far more efficient than the old one. The fact that the film processing cost decreased substantially from 1970 to 1984 might be the outcome of the reasons listed above, not the outcome of the organizations learning how to print the films. The cost of printing paper, for example, might have decreased in that period, or the new printers became available that used less energy and printing paint.
Second, the fact that the processing costs decrease in time in one industry, does not necessarily mean that they will decrease in another as the author of the passage claims.
Third, learning something and becoming more efficient in doing it is a continuous process. It does not happen in an instant. The fact that Olympic Food will soon celebrate its 25th birthday, does not mean that its food processing cost will decrease the moment that the celebration is over. On the contrary - if its costs have not decreased for over 25 years, it is unlikely that they will for the near future.
Finally, in the last sentence the author states, that by minimizing the costs the company will maximize the profits. It is not logical to suggest, that minimizing costs lead to maximizing profits - the company can virtually eliminate all the costs by going out of business, but this does not mean that the organization will maximize its profits. Cost minimization does not lead to profit maximization, cost optimization does.
The passage would have been much more convincing if it addressed all the issues listed above. I do not think that it is sound or logical as it is currently presented.
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