-
Xulei
- Junior | Next Rank: 30 Posts
- Posts: 24
- Joined: Thu Jul 03, 2008 2:39 pm
- Location: Madrid (Spain)
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 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 Food will soon celebrate its 25th birthday, we can expect that our long experience will enable us to minimize costs and thus maximize profits’
Olympic Food makes the assumption that as the company is going to celebrate its 25th birthday, they are going to improve their manufacturing process, reduce costs and therefore maximize profits and uses the example of the color film processing. However, there are serious flaws in this reasoning.
Firstly, and the most obvious, is that the cost of a 3-by-5-inch print didn’t fall from 1970 to 1984. In fact, it has increased because in 1970 the cost per day was 10 cents and 24 years later the cost per day is 20 cents. Thus, the price is twice more expensive.
Secondly, we can’t apply the same principle to the processing of food because it depends on the price of raw material such as vegetables, animals, etc. In fact, nowadays, these prices are increasing up to very high levels that raise the cost of the input and therefore reduce the profit.
Lastly, not all companies reduce their costs as long as they gain experience in the market because cost reduction not only depends on your experience. There are many other political, social and economical factors that may influence in the frozen food industry that could make more difficult cost reduction such as a global economy food crisis like we are living now.
However, the conclusion can be strengthened with information that shows how costs were reducing since the company was founded and how benefits were increasing.
Overall, the argument is not solid enough to get to the conclusion that Olympic Food is going to minimize cost and maximize profits because it is based in the assumption that food industry and color film industry works in a similar way and that they are going to reduce their costs only because they have enough experience without supporting this with information.
‘Over time, the costs of processing go down because as organizations learn how to do things better, they become 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 Food will soon celebrate its 25th birthday, we can expect that our long experience will enable us to minimize costs and thus maximize profits’
Olympic Food makes the assumption that as the company is going to celebrate its 25th birthday, they are going to improve their manufacturing process, reduce costs and therefore maximize profits and uses the example of the color film processing. However, there are serious flaws in this reasoning.
Firstly, and the most obvious, is that the cost of a 3-by-5-inch print didn’t fall from 1970 to 1984. In fact, it has increased because in 1970 the cost per day was 10 cents and 24 years later the cost per day is 20 cents. Thus, the price is twice more expensive.
Secondly, we can’t apply the same principle to the processing of food because it depends on the price of raw material such as vegetables, animals, etc. In fact, nowadays, these prices are increasing up to very high levels that raise the cost of the input and therefore reduce the profit.
Lastly, not all companies reduce their costs as long as they gain experience in the market because cost reduction not only depends on your experience. There are many other political, social and economical factors that may influence in the frozen food industry that could make more difficult cost reduction such as a global economy food crisis like we are living now.
However, the conclusion can be strengthened with information that shows how costs were reducing since the company was founded and how benefits were increasing.
Overall, the argument is not solid enough to get to the conclusion that Olympic Food is going to minimize cost and maximize profits because it is based in the assumption that food industry and color film industry works in a similar way and that they are going to reduce their costs only because they have enough experience without supporting this with information.
