Expert Review of AWA Prompt Please

[mcdonaldaly]

I just started studying for the GMAT so this is my first go at an AWA prompt. I would really appreciate it if you would review it, provide some feedback, and score me. Thanks so much!

Prompt: 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 twenty-fifth birthday, we can expect that our long experience will enable us to minimize costs and thus maximize profits."

Response: Olympic Foods assumes that with more experience, the company will be able to minimize the costs of manufacturing and selling processed foods and thus increase its profits. While Olympic Foods may take advantage of the principle of economies of scale, that is as a company becomes more efficient with time it can reduce the cost per product, there are other factors at play that could prevent the company from maximizing its profits. New FDA regulations, company expansion and fierce competition may result in new costs that hinder the augmentation of its profits.

Since the advent of the FDA, regulations on food and drug industries have only increased. These regulations often cause food and drug manufacturers to jump through hoops in order to generate products that comply with all laws while still maintaining a profit. Large corporations spend millions each year implementing new regulations in order to prevent potential lawsuits. It is highly likely that since Olympic Foods' establishment in 1984, new regulations have been imposed on processed foods. Therefore, while the costs of manufacturing these foods may have declined, other legal and regulatory costs will likely inhibit profit increases.

Another factor to consider is any expansion that Olympic Foods may have undertook in other regions or in different industries. There are numerous reasons why a company may decide to expand, including attracting a larger user base and reducing competition from rival companies. However, while the long-term goal is to increase profits, expansion demands large start-up capital, overhead, and time that will undoubtedly chip away at the company's profits for several years.

Finally, fierce competition from rival processed foods companies may tie-up some of the revenue of Olympic Foods. One way of combating competition is through expansion, as discussed previously. Other methods include advertising, selling the product at a discount, or offering additional services, like free shipping. While the end goal is to attract the largest user base and ultimately increase profits, these competitive tactics require large sums of money and thus may reduce Olympic Foods' overall profit.

While Olympic Foods may benefit from economies of scale, there are several other factors to consider before making the hasty claim that the company will maximize profits on its 25th birthday. Just a few of those include the implementation of regulations, expansion of the company, and programs for reducing competition.