fictitious business that you created for this assignment.
Light Up the Sky, Inc. is a company that manufactures luminescent kites. This company has been in business for the past 10 years and during this time has established itself as a high quality manufacturer of these kites. Even though this company appeals to a small fraction of the entire kite industry, they had been able to maintain a 20% profit margin. Due to the lagging economy, their profit margin dropped below the breakeven point and they are now considering shutting down production.
Assess the current environmental scan factors. Determine the factors that will have the greatest impact on plant operations and management’s decision to continue or discontinue operations.
When considering whether or not to continue operations, there are several factors to consider. First is to perform a market analysis to determine whether or not continuing operations is really feasible. For example, luminescent kites may have been a fad whose time has come and gone. Determining whether or not there is still a market for this product is the first step. Next would be to evaluate how manufacturing costs could be cut without sacrificing the quality of the product. Other factors to consider are:
* Can the company still be profitable by cutting production back to 400 units per month?
* Could less skilled workers be employed in order to decrease the cost of labor?
* What fixed or variable costs could be reduced?
* How feasible would it be to move productions to another area of the country or world in order to reduce production costs?
3. Evaluate the financial performance of the company using the information provided in the scenario. Consider all the key drivers of performance, such as company profit or loss for both the short-term and long-term. Be sure to show the calculations that helped you reach your conclusions.
The following calculations assisted in illustrating decision to “Continue Operations”:
Employee Wages: 100 workers x /day = ,000/day x 20 days/month = $140,000/month spent on employee wages.
Variable input cost: $2,000/day x 20 days/month = $40,000/month in variable costs.
Taking into account that the marginal cost of the last unit is $30: 6000 units/month are produced; 6000 (total units) x $30 per unit = $180,000 per month spent on production.
Total operating costs per month then are: $140,000 (employee wages) + $40,000 (variable costs) + $180,000 (production costs) = $360,000.
Each unit sells for $32/unit: $32 x 6000 = 192,000/month revenue.
Based on these calculations, this company is spending nearly twice the amount to produce the item vs. The amount earned on each item.
4. Recommend how the company can improve its profitability. Then, develop a brief plan to implement the recommendations.
There are several ways that this company could potentially improve their profitability. Below is a list of recommendations for improving profitability.
* Lower the daily variable costs. To do this the company needs to inventory these costs and make a determination as to which of these costs could be lowered or eliminated.
* Lower the daily fixed costs. Second, an inventory of the company’s fixed cost needs to be developed to needs to inventory these costs and make a determination as to which of these costs could be lowered or eliminated.
* Consider lowering employee wages, reducing the number of employees, or removing and hiring new employees at a lower wage.
* Evaluate production costs to determine if these can be lowered by substitution of products, lower the number of units produced per day, or explore modifying the product in some way.
* Consider raising the price of each item sold from $32 to $60/unit.
5. Assess the circumstances in which the company should discontinue operations. Provide a rationale with your response.
As things currently stand with this company, my recommendation would be to discontinue operations. If a complete evaluation of the company’s operating, variable and fixed costs cannot be reduced then the company will continue to lose money. If on the other hand, it is possible to implement any of the above recommendations and reduce the total operating costs to below 190,000/month then I would recommend the company to continue operations. Alternately, if it is feasible to increase the selling price per unit to at least $60.00/unit, I would again recommend continuing operations.
References
1. Planning Resource Center. What is an Environmental Scan? Retrieved from http://work911.com/planningmaster/faq/scan.htm.
2. Minnesota Management and Budget. Internal and external environmental scanning factors. Retrieved from http://www.mmb.state.mn.us/keyinfo3/1708-internal-and-external-environmental-scanning-factors.
3. North Carolina State University, North Carolina Cooperative Extension Service. Management Tools for Increasing Profitability. Retrieved from http://www.ces.ncsu.edu/resources/economics/ag418/
