ECO 550 Assignment 2 Operations Decisions
ECO 550 Assignment 2 Operations Decisions fin571
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Date Created: 11/11/15
Assignment 2: Operations Decisions Name ECO/550: Managerial Economics University of Phoenix Instructor’s Name Date Operations Decisions The purpose of this paper is to discuss the reasons why I, as a hired management consultant, would suggest a fictitious company either shut down operations or continue them based on its operational health. In order to do this I must first describe, in brief, the basic details of the company I have created to provide some tangibility to this assignment. Then I will assess the current environmental scan factors relevant to the decision making process, focusing on those which have the greatest impact on both the overall plant operations and the managerial decision of whether or not to discontinue operations. After which I will evaluate the company’s financial performance using data provided for the assignment related to the fictitious scenario. In doing this I will need to consider the key drivers of said performance including the company’s profit or loss in both the short term and long term, discussing how each of these factors influence the managerial decisions. Next I will recommend how the company might improve its profits in order to deliver more stakeholder value and provide a basic plan of how to best implement the recommendation. Finally I will assess those circumstances under which the company should discontinue operations as well as how management should react when confronted with those circumstances. For this assignment I have created Greatneck Incorporated, a manufacturer based in northeast Ohio. Greatneck Inc. key competency is its manufacturing of space heaters which is mainly distributes through the big box retail stores such as WalMart, Target, Home Depot, and Lowe’s. Greatneck’s 100 workers produce 6,000 space heaters each month at a price of $32. The plant’s work schedule is for 20 days each month and each worker earns $70 per day while the variable cost for Greatneck is $2000 per day. Concerning the current environmental scan factors we must understand that they fall into six (6) categories: political (or governmental), economic, cultural (or social), technological, environmental, and finally legal (Bayode, et al. 2012). A break down of these into the specific points of each that have the deepest impact on a managerial decision follows. Other than taxes and issues such as antidiscrimination laws there are few governmental factors Greatneck must concern itself with. Although some of the pieces and parts that go into their product come from foreign countries such as China and Taiwan, its final products are shipped and sold right here in the United States. This limits the trade regulations it must contend with and puts the majority of the burden for those it does face on its supplier. Additionally. While a few of its 100 workers are Puerto Rican nationals, it has made great efforts to ensure they are legal. Still Greatneck does need to remain vigilant and cooperative with Immigration and Customs Enforcement (ICE) so that it does not run into any unforeseen problems. The faltering economy did put a damper on Greatneck’s business the last few years, but it has weathered it well. It did this through lean manufacturing, using a just in time inventory management system. It went into the recession with a limited debt which it was able to pay off with its available cash. The overall inflation issues miring the United States has not affected it much as it managed to lock in reasonable prices for those items it buys from overseas each year. It is a small enough business with few employees of retirement age and a wellmanaged 401k for those that are. It was during the economic boom of the 1990’s that Greatneck expanded its business to its present level. But its management knew there were limitations and avoided over extending itself and growing too fast so that when the recession hit it was able to maintain its present workforce. However it has only offered minimal rises to its workers recently and has reduced the available overtime. In general, the technology of space heaters does not grow by leaps and bounds. Even though there have been changes in their makeup over the past decades, these advancements have mainly been in their energy efficiency and safety. In contrast, the manufacturing of the units has changed a lot, as it has in all of manufacturing these past decades. With the advent and growth of robotics and computer aided manufacturing Greatneck’s work force has steadily changed from rough laborers to trained and educated operators. Distributing their products as they do through retail stores, Greatneck only recently – as in the last few years – began offering internet sales where they sell and ship their heaters directly to the consumer. On the direct environment front, Greatneck is a manufacturer and therefore it needs to ensure its plant is meeting, or exceeding, all EPA regulations. While it does not burn coal or perform other potentially volatile acts it still needs to be aware of, and on top of, its carbon footprint. The biggest issue being its handling of any mercury. It must be able to account for every drop of the potential poison. As for the generalization of the environmental aspect, Greatneck has managed to build a strong brand name through its offering of safe, quality products at reasonable prices. Its track record provides it with a strong competitive advantage, and even allows them to sell their products at a slightly higher cost due to their known quality. It has also garnered a reputation as a responsible community member and makes a great effort to recycle the unused copper wire, metal, and ceramic its manufacturing process creates. The biggest concerns for Greatneck, as with many small manufacturers like it, are the legal lines it must walk each and every day. They must ensure they are adhering to all the rules and regulations governing issues such as labor and unemployment. They also need to be focused on the health and safety of both its workers and its consumers. On the cultural front, Greatneck needs to be aware of who its consumers are. While their main purpose is to heat some specified space, Greatneck’s heaters are purchased for two different spaces and usually by two different types of consumers. The first consumer is someone living on a fixed income, usually residing in cheaper apartment or home with little or no insulation. This consumer is looking to keep their overall heating bill low during the cold winter months and they used a space heater to warm a specific room – or part thereof during a certain time. This may be their bedroom while they are sleeping through the night or the area surrounding their chair as they watch their evening television programs. The space heater allows them to heat only this smaller area while keeping their furnace set low and not wasting money heating the entire home. The second consumer is an office or cubicle worker. These consumers have bosses who are also keeping their eye on the bottom line and know they can save a few dollars by not overheating a large cubiclefilled area or a large plant area that happens to effect the area of the front offices. These two groups represent a cross section of ages, and education levels. Young college graduates just starting a career have a habit of occupying those cubicles as do older, less educated persons who are simply limited in their advancement opportunities due to the lack of a degree. But at the same time you can have any one struggling through on a fixed income, especially senior citizens living on social security. In evaluating the financial performance of any business I am a firm believer in simplicity, at least as a starting point. So concerning Greatneck’s operations I offer the following simple calculations: 100 workers making $70 per day and working 20 working days per month = per month wage cost 100 x 70 x 20 = $140,000 per month wage cost $2,000 per day variable costs for 20 working days per month = per month variable cost $2,000 x 20 = $40,000 per month variable cost $140,000 per month wage cost and $40,000 per month variable cost = total monthly costs $140,000 + $40,000 = $180,000 total monthly costs 6,000 units produced per month at a price of $32 per unit = monthly gross profits 6,000 x $32 = $192,000 monthly gross profits $180,000 total monthly costs taken away from $192,000 monthly gross profits = monthly net profits $192,000 $180,000 = $12,000 monthly net profits Without getting any deeper into the case I would have to say Greatneck should continue its operations. After all, it is making a net annual profit of $144,000 during these troubled years. But the assignment does ask us to go deeper, and as it does it removes that net annual profit. We are told that the company’s fixed cost are so that its total costs exceed its total revenue and the marginal cost of the last unit produced is $30. The first part fo that sentence suggest that Greatneck should shut down. After all, it has been in business for a number of years and therefore it should not be loosing money every year. The only possible recommendation for how the company might imporve its profits is to reduce its daily variable cost. But hjow it wpould do this I can’t say since $2,000 for a manufacturing facility with its need for electricity and heat/ac, not to mention the pieces parts it uses to produce whatever it is creating (in this case space heaters) does not seem too high. But let’s assume it can. Let’s have the company search out new suppliers, companies that will provid eit with the raw materials at a cheaper cost. Is it the right theing to do? The smart thing? Greatneck has built a reputation for safe, quality heaters and part of those qualities come form the raw materials it uses. So changing suppliers comes with a risk. Now a plant big enough to make the space heaters is at leats a few thousand square feet, the powering of which cannot be cheap. Not to menation the heating of it. So there is little chance that Greatneck coulod reduce the cost there. So I suggest, in order to imporve its profits, Greatneck removes half its head office personnel. Fire them. There go a great number of bloated salaries, which will reduce overall cost and improve profits (McNichols & Boyd 1954). The only circumstances under which Greatneck should discontinue operations is when the cost of production so greatly out run the profits that the company is falling deeper into debt each and every month (Ahmed et al 2011). And when that happens management should react immediately, halting all further debt growing actions, and close the doors as fast as possible. That way the company does not drain more of its reputation and might be able to resurrect itself like a phoenix rising from the ashes on another day. References Ahmed I., Aamir M., & Hafiza A. (2011) External factors and entrepreneurial career intentions; moderating role of personality traits. International Journal of Academic Research, 3, 5. Retrieved from https://webebscohost com.libdatab.strayer.edu/ehost/pdfviewer/pdfviewer?vid=4&sid=58ec9b958f7a 4de18f637436ef55e645%40sessionmgr13&hid=11 Bayode O., Babatunde, B.O. & Adebisi, A.O. (2012) Strategic environmental scanning and organization performance in a competitive business environment Economic Insights – Trends and Challenges, 64, 1. Retrieved from https://webebscohost com.libdatab.strayer.edu/ehost/pdfviewer/pdfviewer?vid=6&sid=58ec9b958f7a 4de18f637436ef55e645%40sessionmgr13&hid=11 McGuigan, J.R., Moyer, R.C. & Harris, F.H. (2011) Managerial economics mason, oh Engage Learning McNichols, T. J. & Boyd, F. V. (1954) Adjustment of fixed assets to reflect price level changes. Accounting Review, 29, 1. Retrieved from https://webebscohost com.libdatab.strayer.edu/ehost/pdfviewer/pdfviewer?vid=7&sid=58ec9b958f7a 4de18f637436ef55e645%40sessionmgr13&hid=11
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