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 do things better, they become more efficient. In colour film processing, for example, the cost of a 3 by 5 inch print fell from $.50 for for five day service in 1970 to $.20 for one-day service in 1984. The same principle applies to the processing of food. And since Olympic foods this will soon celebrate its 25th birthday, we can expect that our long experience will enable us to minimize costs and thus maximize profits"
The prompt argument is flawed for a number of reasons. The main flaw in the argument is that it makes errors in causality by assuming that only processing costs factors in the total costs of the organization. Cost of raw material and cost of labour are other major costs that can influence the total costs and so the profitability.
Further, it is also possible that technological innovations over 14 years have led to the reduction in processing costs in the colour film processing industry. The frozen food industry might not have had the same level of technological advancement. The third major flaw in this argument is that it ignores the financial performance of 25 years and instead uses an isolated case from a non related sector to set expectations of future performance.
Processing costs account for only a fraction of the total costs that an organization incurs. The argument assumes that as processing costs go down, profitability will increase. However, the argument fails to account for other costs such as cost of raw material, cost of labour and overheads. An increase in any of these can completely offset increase in profits due to reduction in processing costs. Because of this major oversight, this argument is questionable.
The prompt also assumes that reduction in cost of a print is because of improvement in processes over time. However, by not delving into the details of what caused the improvement in processes, the argument is further weakened. It is possible that major improvements in technology led to the reduction in processing time and costs of colour prints. Unless we know for certain whether similar improvements in technology have occurred in the frozen food industry, this argument is unpersuasive.
Further, instead of using the historical financial history of Olympus Foods to forecast future performance, the argument compares it to another industry sector altogether.
Since there is no information about Olympus Food's past performance or even if it has reduced it's processing costs over the last 25 years, this line of reasoning is highly questionable.
The argument can be dramatically improved in a number of ways. First, the argument should cite examples of reduction in costs in industries that are similar to frozen food processing, and not something completely unrelated such as colour print processing. Second, the argument should elaborate on all the major costs to the business, and not focus on only processing costs.
Thirdly, and most importantly, historical data of Olympus Foods should be used to evaluate the future potential and projections of the company.
To conclude, the argument is weak and untenable, and needs major changes for it to hold any water.
"Over time, the costs of processing go down because as organizations learn how do things better, they become more efficient. In colour film processing, for example, the cost of a 3 by 5 inch print fell from $.50 for for five day service in 1970 to $.20 for one-day service in 1984. The same principle applies to the processing of food. And since Olympic foods this will soon celebrate its 25th birthday, we can expect that our long experience will enable us to minimize costs and thus maximize profits"
The prompt argument is flawed for a number of reasons. The main flaw in the argument is that it makes errors in causality by assuming that only processing costs factors in the total costs of the organization. Cost of raw material and cost of labour are other major costs that can influence the total costs and so the profitability.
Further, it is also possible that technological innovations over 14 years have led to the reduction in processing costs in the colour film processing industry. The frozen food industry might not have had the same level of technological advancement. The third major flaw in this argument is that it ignores the financial performance of 25 years and instead uses an isolated case from a non related sector to set expectations of future performance.
Processing costs account for only a fraction of the total costs that an organization incurs. The argument assumes that as processing costs go down, profitability will increase. However, the argument fails to account for other costs such as cost of raw material, cost of labour and overheads. An increase in any of these can completely offset increase in profits due to reduction in processing costs. Because of this major oversight, this argument is questionable.
The prompt also assumes that reduction in cost of a print is because of improvement in processes over time. However, by not delving into the details of what caused the improvement in processes, the argument is further weakened. It is possible that major improvements in technology led to the reduction in processing time and costs of colour prints. Unless we know for certain whether similar improvements in technology have occurred in the frozen food industry, this argument is unpersuasive.
Further, instead of using the historical financial history of Olympus Foods to forecast future performance, the argument compares it to another industry sector altogether.
Since there is no information about Olympus Food's past performance or even if it has reduced it's processing costs over the last 25 years, this line of reasoning is highly questionable.
The argument can be dramatically improved in a number of ways. First, the argument should cite examples of reduction in costs in industries that are similar to frozen food processing, and not something completely unrelated such as colour print processing. Second, the argument should elaborate on all the major costs to the business, and not focus on only processing costs.
Thirdly, and most importantly, historical data of Olympus Foods should be used to evaluate the future potential and projections of the company.
To conclude, the argument is weak and untenable, and needs major changes for it to hold any water.
