The Company (X)
The company, X, business involves the production of aluminum beer and soft drink cans. It recycles beer and soft drink cans by re-moulding them and selling them to beer and soft drink manufacturing factories. The company has been in this industry for only one year and the management team believed that it could start making profit after some time. However, the business seems to increase its cost of production which has now worried the management team. Some of the operations that the company is engaged in is purchasing of the already used cans. It then has a melting unit where it melts he cans and moulds them anew. The final stage is the labeling section. Currently, there is only one client to the cans but several others are willing to give the company respective contracts, once their current attachments expires. This means that there will be more c\labeling in future than what there is today.
Environmental Factors to Consider before Making Business Decisions
Before critical decisions are made about the organization, especially with regard to the management procedures, it is important to determine the environmental factors that should be considered (Dietrich, 2010). These factors include competition, Cost and Benefit, Social Responsibility, Economic Environment (Davis, 2012). Competition refers to the businesses that provided similar products as those produced by a given firm, or selling products that can be used to replace those produced by the main firm (Davis, 2012). The economic environment seeks to determine the ability of the target customers to buy the product or service. It determines whether the market can purchase the products at a certain price. Economic environment is vital in the decision making process because poor understanding of the environment would lead to losses or collapse of the company if the product is unaffordable to the market (Davis, 2012). A good example is when a phone manufacturing company is caught in an economic recess that leads to customers not able to buy their phones. In such a case, the managers may decide to produce a cheaper version of the original phone (Dietrich, 2010). Social responsibility refers to the concept where an organization puts into consideration the well being off the surrounding communities and general public (Chang, 2006). It may involve charity to schools and hospitals in an attempt to have a good rapport with the general public (Chang, 2006). When an organization is located in a region where it is not appreciated, there is a high likelihood that it would not be very successful. Cost and benefit refers to the costs that the organization would incur in order to produce and market their products. This would help them determine the cost at which the products would be sold. If the wrong methods were used to determine the cost, the company would end up making undesirable losses (Dietrich, 2010).
Situation at company X
Company X has continued to make losses. It has to make management decisions that would determine whether it would continue its operations or quit the business. The most important factors to consider would be competition, the economic environment and the analysis of cost and benefits. This is because the company could be trading with the wrong goods at the right place. Though there is demand for the cans, the company could be producing them, yet there is less demand for them. This is because the process of recycling bottles, which are the alternate containers for drinks, could be easier and the companies that are targeted as market may not be able to buy cans. They may prefer to stick with bottles that are easily washed and re-used. In this case, cans could be uneconomical to produce as the market environment could be unwilling to buy goods that they could not easily recycle. Therefore, competition by complementary goods could also be assessed and determined appropriately.
Cost and benefit is a vital aspect that people need to understand about a given business environment. It determines the cost of production with the individual input costs such as labor and cost of raw material becoming a tool to assessment. It also considers the possible returns that the company could realize after transacting the products to the market. The fixed costs such as rent would be considered and the location of the factory could be changed if the location provides higher unnecessary costs.
Profitability Analysis for Company X
Company X has a very poor profitability record. It has a very high marginal cost of production at $30 per unit. It is a very serious matter since the difference between the marginal variable cost and the price of every unit is only $2. This amount is expected to cater for the fixed costs and provide the company with substantial profit. In the short term, the company will continue to loose money because the cost of production may not be changed easily. In the long term, the company could make efficient managerial decisions that could save the company from collapsing.
Profit/ loss analysis
Total Revenue for 6000 units* $ 32 per unit 192000
Total cost of producing 6000 units = $30* 6000 (180, 000)
Total profit per month (disregarding the fixed cost) 12,000
The company could consider closing down business before more damage is done. This is usually the easiest way that the managers can stop the risk of continued losses. However, with the high investment cost that have already been incurred, it would not be the best idea to close down business. He managers should sit down and come up with a plan that should ensure that there are less money spent on production. Another way is through the determination on increasing the cost of their products. However, as mentioned before, they should first look at the competitor prices, substitute goods as well as the ability of their customers to buy the products at an increased prices.
The best way, however, to ensure that the cost of production is reduced, is through the reduction of variable cost. This could be done through the reduction of employees, yet keeping the number of units produced monthly at 6000. The variable cost of production totals at $180,000. Of this, $140,000 is taken up by employee salaries. Therefore, the best way to reduce the cost of production in the case of company X would be through the reduction of employee costs. They should either produce more units per day, or less employees producing the same number of units. The issue is more difficult because the dismissal of some of the employees might not auger well with the Social corporate responsibility. Therefore, the company should seek to increase the number of units by the 100 employees at the same wage of $70. This could be achieved using better technology of production, better methods of collection of used tins, better and more strict timetables among other methods. The daily variable cost of production only totals at $40,000 which is very reasonable.
100 employees @ $ 70 for 20 days =$ 7000 * 20 = 140,000
Daily variable cost of production = $2000 * 20 = 40,000
From the above information, the cost of production is highly significantly increased by the employee salaries. Reduction or better utilization of these wages would give the company a significant relief.