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18 Jan 2015, 13:03
Kudos
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Since this was my first time writing an AWA, I thought I would get it check out. Would love to get some pointers!
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.
In their 25th annual report, Olympic Foods provides a positive outlook to its stockholders through discussion of its battle plan for the future. In it, the frozen food company talks about how it aims to increase its profitability using the theory of economies of scale; whereby, the cost of production goes down with time. While the company may very well be able to gain profitability as it describes, there are a few assumptions and explanations made in the report that make their argument weak.
Firstly, Olympic Foods assumes that economies of scale would occur as a result of their experience. While, the company might be learning internally, there are a lot of factors that affect profits. In addition, there is no proof to the claims of learning provided by Olympic Foods. So, it is very possible that instead of economies of scale, diseconomies might occur that might lower profitability by increasing costs of production.
Secondly, the example mentioned in the report talks about a comparison between the food industry and the film processing industry; however, it adds little supporting evidence to the argument. A film processing industry cannot be used to substantiate a claim within the food industry. A lot could have changed for the film industry, such as an increase in demand, newer technologies for the field or other productive efficiency increases. Advantages that could not be applied to the food industry or anyone outside the film processing industry. Likewise, there could be expenses within the food industry that the film industry does not have to deal with. There is no link between the two industries and thus, this comparison should be considered invalid.
Thirdly, Olympic Foods considers its longer experience a means for cost minimization and profit maximization. But, there are two fallacies in this statement. Olympic food celebrates its twenty-fifth year, but there is no way to know where on the life cycle the company is currently present. So, the company’s long experience could simply be a start of their journey. After all, there are many companies well over 100 years in business that are still going as strong as ever. Additionally, lowering costs does not always result in maximization of profits. Factors such as competition and availability of substitutes, affect the profitability of companies.
While the predictions made by Olympic Foods could be true, there are no proofs provided by the company to back their claims. A more wholesome report would contain more valid correlations and statistical evidence, as well as the learning mechanism used within the firm in order to boost profitability and lower costs. Until then, it is unlikely that stockholders would get reassurance reading through this current report.
Thank you to any and all that take the time out to reply.
The Argument
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 Essay
In their 25th annual report, Olympic Foods provides a positive outlook to its stockholders through discussion of its battle plan for the future. In it, the frozen food company talks about how it aims to increase its profitability using the theory of economies of scale; whereby, the cost of production goes down with time. While the company may very well be able to gain profitability as it describes, there are a few assumptions and explanations made in the report that make their argument weak.
Firstly, Olympic Foods assumes that economies of scale would occur as a result of their experience. While, the company might be learning internally, there are a lot of factors that affect profits. In addition, there is no proof to the claims of learning provided by Olympic Foods. So, it is very possible that instead of economies of scale, diseconomies might occur that might lower profitability by increasing costs of production.
Secondly, the example mentioned in the report talks about a comparison between the food industry and the film processing industry; however, it adds little supporting evidence to the argument. A film processing industry cannot be used to substantiate a claim within the food industry. A lot could have changed for the film industry, such as an increase in demand, newer technologies for the field or other productive efficiency increases. Advantages that could not be applied to the food industry or anyone outside the film processing industry. Likewise, there could be expenses within the food industry that the film industry does not have to deal with. There is no link between the two industries and thus, this comparison should be considered invalid.
Thirdly, Olympic Foods considers its longer experience a means for cost minimization and profit maximization. But, there are two fallacies in this statement. Olympic food celebrates its twenty-fifth year, but there is no way to know where on the life cycle the company is currently present. So, the company’s long experience could simply be a start of their journey. After all, there are many companies well over 100 years in business that are still going as strong as ever. Additionally, lowering costs does not always result in maximization of profits. Factors such as competition and availability of substitutes, affect the profitability of companies.
While the predictions made by Olympic Foods could be true, there are no proofs provided by the company to back their claims. A more wholesome report would contain more valid correlations and statistical evidence, as well as the learning mechanism used within the firm in order to boost profitability and lower costs. Until then, it is unlikely that stockholders would get reassurance reading through this current report.
Thank you to any and all that take the time out to reply.
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