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 you find...
My essay:
Although this argument may seem logically sound, it fails to provide relevant real context or strong examples in order to substantiate the conclusion that costs for food production can be expected to decline and profit to maximize for Olympic Foods. The premise of the argument is that as organizations learn how to do things better, they become more efficient and minimize costs. However, the argument is flawed because it falsely assumes that costs of a product and maximizing profit only depend on the production process and it assumes that developments in the process of color film printing are applicable also to food production.
First, the argument above wrongly assumes that production efficiency is the only factor with impact on the costs and therefore on profits. However, the author fails to support this assumption and it is contradicted by real world evidence. For example, commodity prices are very volatile today. Some prices for ingredients can rise for a long period. If this happens, the company’s production process can become even more efficient but the costs will still rise.
Second, the comparison with color film processing is flawed because the argument assumes that inclining efficiency in picture printing is highly correlated with efficiency on frozen food production. Yet, the printing of color pictures differs very much from the production of food. Frozen food comes in a large variety and there are several production processes and always new dishes, which is not comparable to printing processes that basically stay the same over a longer period of time. So assuming that costs fall and profits rise in food production just because this is what happens in printing is certainly not a cogent reason.
Moreover, the argument could be improved by referring a survey that shows the high correlation between cost and profit development of photograph printing and food production. Furthermore, to strengthen the argument it could be stated that Olympic Foods has fixed contracts for commodities for several years and does not have to worry about rising prices.
In conclusion, the argument in the annual report for stockholders would not give an incentive to keep the stock. The cost and profit expectations are unsecure since the argument is flawed. It assumes that prices for commodities do not incline more than efficiency. Moreover, the argument wrongly concludes that Olympic Foods will grow and become more efficient with time just because companies in the photograph printing sector did and assumes that this development is fully applicable.
“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 you find...
My essay:
Although this argument may seem logically sound, it fails to provide relevant real context or strong examples in order to substantiate the conclusion that costs for food production can be expected to decline and profit to maximize for Olympic Foods. The premise of the argument is that as organizations learn how to do things better, they become more efficient and minimize costs. However, the argument is flawed because it falsely assumes that costs of a product and maximizing profit only depend on the production process and it assumes that developments in the process of color film printing are applicable also to food production.
First, the argument above wrongly assumes that production efficiency is the only factor with impact on the costs and therefore on profits. However, the author fails to support this assumption and it is contradicted by real world evidence. For example, commodity prices are very volatile today. Some prices for ingredients can rise for a long period. If this happens, the company’s production process can become even more efficient but the costs will still rise.
Second, the comparison with color film processing is flawed because the argument assumes that inclining efficiency in picture printing is highly correlated with efficiency on frozen food production. Yet, the printing of color pictures differs very much from the production of food. Frozen food comes in a large variety and there are several production processes and always new dishes, which is not comparable to printing processes that basically stay the same over a longer period of time. So assuming that costs fall and profits rise in food production just because this is what happens in printing is certainly not a cogent reason.
Moreover, the argument could be improved by referring a survey that shows the high correlation between cost and profit development of photograph printing and food production. Furthermore, to strengthen the argument it could be stated that Olympic Foods has fixed contracts for commodities for several years and does not have to worry about rising prices.
In conclusion, the argument in the annual report for stockholders would not give an incentive to keep the stock. The cost and profit expectations are unsecure since the argument is flawed. It assumes that prices for commodities do not incline more than efficiency. Moreover, the argument wrongly concludes that Olympic Foods will grow and become more efficient with time just because companies in the photograph printing sector did and assumes that this development is fully applicable.
