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 colour 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 this argument. In your discussion be sure to analyze the line of reasoning and the use of evidence in the argument. For example, you may need to consider what questionable assumptions underlie the thinking and what alternative explanations or counterexamples might weaken the conclusion. You can also discuss what sort of evidence would strengthen or refute the argument, what changes in the argument would make it more logically sound, and what, if anything, would help you better evaluate its conclusion.
The excerpt from the annual report sent to stockholders of Olympic Foods, a processor of frozen foods states that the Company expects costs to minimize so as to enable maximization of profits. This is stated on the rationale that when Organizations are in the business community for a long time, over a period, the costs generally reduce. An example has been provided with reference to colour film processing industry where 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 statement made by the Company is, in my opinion, based on several theories. One of those theories is specialization. When an Organization is in the field for a long period of time, it develops a specialization. Rather, its employees develop the specialization. As and when an employee gets trained in a particular field, he becomes a master. This enables him to find out his own short cuts of sorts while maintaining the quality level of work. These short cuts, somewhere or the other, help the organizations cut costs which even if by a small margin, help immensely.
The second theory which I feel has been relied on is more of an assumption. The Organization assumes that the economy is facing no ups or downs. It is a flat line. This would indicate that the Company is facing no inflation or deflation, for that matter. This statement then becomes a strictly theoretical statement, not applicable to real life scenarios. In the real world, we have inflation, deflation, at times the purchasing power is high, other times, it is not so. These points cannot be overlooked while presenting the financial statements since a true and fair view needs to be presented.
The third theory that the Company has overlooked is that fact that cost reduction alone may not help in profit maximization. It may so be assumed by the stockholders that if cost is reducing, the cost components may or may not be working up to the mark. This may in turn raise questions as to quality control done by the Company.
The Organization’s statement would have had a deeper impact had it included the concerns of inflation, the supplier information, pricing policies and marketing strategies. Inflation means the prices of goods keep increasing. It is not something that happens overnight. Organizations know about all this in advance and hence would be able to give a nearly accurate future profitability data. Also, as far as manpower is concerned, the Organization should ensure that the employees are not slacking off. It so happens that when a certain comfort level is reached, the employees start taking the Organization for granted. This shouldn’t be the case and the Organization needs to make several efforts to keep the employee motivated. This would not only help build a good corporate image but also show the stockholders that the Organization cares and gives everyone their dues. Again, as stated earlier, only reduction in cost is not going to help with maximization of profit. The consumers would want to share the benefit of cost by asking the Organization to reduce the price. Hence, the Company should also look to increase supply of the product, thus reaching out to the majority and increasing their sales.
In my opinion, had the Company taken into account the above mentioned points and then made an appropriate statement, it would have been well rounded and complete.
Comments are most welcome!