GMAT Essays (AWA)

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.”


The argument concludes that Olympic Foods will be able to maximize its profits through reducing costs. The conclusion is based on the claim that over time organizations improve their processes and reduce costs. An example from color film processing is presented in support of this contention. Since Olympic Foods has been long in business, it is reasoned that by the virtue of analogy, the time-improvement principle holds in its case as well. Although, at a first glance, the arguments appears well reasoned, there are some inherent flaws in its premises and assumptions.

First, the example of the price reduction of a color print is questionable. It is assumed that the color print price has fallen solely because of cost decrease. This assumption automatically excludes the possibility that some other factors have contributed to this effect. For instance, price may have fallen because of increased competition. Even if the price decrease is due to cost reduction, there is no guarantee that the costs have fallen because of process improvement, and not because of other reasons. One possible explanation is that prices of materials used In color print production have fallen during the period.

Second, even if the stated relationship between time and cost reduction holds in color film processing, it is not certain that it can be applied to food processing as well. The only stated by the author common feature of both industries is that they are ‘processing’ industries. Cost behavior may be driven by completely different factors in each of them and therefore analogy may be impossible with regard to cost reduction.

Third, it is assumed that cost minimization automatically leads to profit maximization. This need not be the case at all. If cost reduction is accompanied by revenue deterioration, the result may well be even a loss. Costs are only one part of the Revenues-Costs-Profit relationship. Therefore, focusing only on costs, without taking into account revenues, cannot justify the claim that profits are maximized.

All the abovementioned weaknesses make the argument prone to criticism. Therefore, it cannot be conclusively argued that Olympic Foods will maximize its profits only because it has long standing experience in its business. Eliminating the presented holes in the argument will strengthen its logic.

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