In order to receive an exemplary score on this portion of your paper, you’ll need to meet the following criteria:
-Analyze the various costs a firm faces, their trends over time, and how they have impacted the firm’s profitability using concrete examples to substantiate claims. To help complete this section, you’ll need to view the income statement for you firm, preferably for the last five years (if available). The income statement is a financial statement that shows a firm’s revenues, costs, and profit over a period of time. You can use the income statement (or other research, if available) to see how different production costs have changed over time. For help with understanding the income statement, see page 266 in your text. Remember to discuss how the costs have impacted the firm’s profitability. Profit is equal to total revenue minus total costs.
-Accurately apply the concepts of fixed and variable costs to the firm for informing its output decisions and provides insight into how the firm can manage these costs. In order to do this you’ll need to understand the difference between fixed and variable costs. The total costs your firm faces are the sum of the variable and fixed costs (the costs of all the inputs the firm uses in production). Variable costs are costs that change as output changes. Fixed costs are costs that remain constant as output changes. It’s also important to understand the difference between the short run and the long run. The short run is a period of time during which at least one of a firm’s inputs is fixed. The long run is the period of time in which a firm can vary all of its inputs, adopt new technology, and increase or decrease the size of its physical plant. In this section of your paper, we will just look at how a firm makes output decisions in the short run.
For assistance in assembling the data you'll need, please use the Costs Of Production Help Spreadsheet that I have prepared. Having trouble reading those financial statements to find the data? Take a look at this tutorial.
Below is an example of the Costs of Production for the Hershey Company.
Cost of Production
If supply costs increase, so will the cost to manufacture products, which changes the company’s profit margins if costs are not adjusted according to product demand and projected sales. Cocoa; the key ingredient needed to make chocolate, has climbed “more than 45% since early 2013” (Ferdman, 2014). Hershey’s pricing strategy is not designed to pass fluctuating supply costs onto the consumer, “the company factors the volatility into their pricing assuming pinched profits today will be followed by swollen profits tomorrow” (Ferdman, 2014). The root cause behind the rising cost of cocoa is that farmers are not able to keep up with the demands from the emerging global market as the popularity and consumption for chocolate grows. In 2014, Hershey had to “raise the price of its chocolate to compensate for the abnormally high cocoa prices, which amounted to roughly eight percent” (Ferdman, 2014). The decision was based on the increased cost of production and the influence it would have on the company’s margins, which were already down from the previous year’s quarterly earnings of 46.1% to this year’s earnings of 43.8% (Gasparro, McCarthy, 2014).
The company’s fixed costs such as; advertising, insurance and property taxes do not change with the level of output. But the variable costs such as commodities needed to make chocolate will fluctuate based on production activity. When the output activity is high, supply spending increases, and when the output activity is low, supply spending decreases. When the company foresees a decline in sales, the production schedule is adjusted to reduce output, which decreases the company’s variable costs. The devised plan is meant to maximize profits and when the company does not adhere to this arrangement, the added costs impact profit margins. This level of error was one of the factors on why the company’s margins dropped from the previous year’s earnings. The company did not “adjust its production schedule as quickly as they should have in light of how sales were changing” (Gasparro, McCarthy, 2014).
References
Gasparro, A., & McCarthy, E. (2014, October 29). Hershey Margins Hurt by Higher Costs - WSJ. Retrieved from http://www.wsj.com/articles/hershey-sales-rise-5-8-1414582768
Ferdman, R. (2014, July 18). Your chocolate addiction is only going to get more (and more, and more) expensive - The Washington Post. Retrieved from http://www.washingtonpost.com/blogs/wonkblog/wp/2014/07/18/your-chocolate-addiction-is-only-going-to-get-more-and-more-and-more-expensive/
-Analyze the various costs a firm faces, their trends over time, and how they have impacted the firm’s profitability using concrete examples to substantiate claims. To help complete this section, you’ll need to view the income statement for you firm, preferably for the last five years (if available). The income statement is a financial statement that shows a firm’s revenues, costs, and profit over a period of time. You can use the income statement (or other research, if available) to see how different production costs have changed over time. For help with understanding the income statement, see page 266 in your text. Remember to discuss how the costs have impacted the firm’s profitability. Profit is equal to total revenue minus total costs.
-Accurately apply the concepts of fixed and variable costs to the firm for informing its output decisions and provides insight into how the firm can manage these costs. In order to do this you’ll need to understand the difference between fixed and variable costs. The total costs your firm faces are the sum of the variable and fixed costs (the costs of all the inputs the firm uses in production). Variable costs are costs that change as output changes. Fixed costs are costs that remain constant as output changes. It’s also important to understand the difference between the short run and the long run. The short run is a period of time during which at least one of a firm’s inputs is fixed. The long run is the period of time in which a firm can vary all of its inputs, adopt new technology, and increase or decrease the size of its physical plant. In this section of your paper, we will just look at how a firm makes output decisions in the short run.
For assistance in assembling the data you'll need, please use the Costs Of Production Help Spreadsheet that I have prepared. Having trouble reading those financial statements to find the data? Take a look at this tutorial.
Below is an example of the Costs of Production for the Hershey Company.
Cost of Production
If supply costs increase, so will the cost to manufacture products, which changes the company’s profit margins if costs are not adjusted according to product demand and projected sales. Cocoa; the key ingredient needed to make chocolate, has climbed “more than 45% since early 2013” (Ferdman, 2014). Hershey’s pricing strategy is not designed to pass fluctuating supply costs onto the consumer, “the company factors the volatility into their pricing assuming pinched profits today will be followed by swollen profits tomorrow” (Ferdman, 2014). The root cause behind the rising cost of cocoa is that farmers are not able to keep up with the demands from the emerging global market as the popularity and consumption for chocolate grows. In 2014, Hershey had to “raise the price of its chocolate to compensate for the abnormally high cocoa prices, which amounted to roughly eight percent” (Ferdman, 2014). The decision was based on the increased cost of production and the influence it would have on the company’s margins, which were already down from the previous year’s quarterly earnings of 46.1% to this year’s earnings of 43.8% (Gasparro, McCarthy, 2014).
The company’s fixed costs such as; advertising, insurance and property taxes do not change with the level of output. But the variable costs such as commodities needed to make chocolate will fluctuate based on production activity. When the output activity is high, supply spending increases, and when the output activity is low, supply spending decreases. When the company foresees a decline in sales, the production schedule is adjusted to reduce output, which decreases the company’s variable costs. The devised plan is meant to maximize profits and when the company does not adhere to this arrangement, the added costs impact profit margins. This level of error was one of the factors on why the company’s margins dropped from the previous year’s earnings. The company did not “adjust its production schedule as quickly as they should have in light of how sales were changing” (Gasparro, McCarthy, 2014).
References
Gasparro, A., & McCarthy, E. (2014, October 29). Hershey Margins Hurt by Higher Costs - WSJ. Retrieved from http://www.wsj.com/articles/hershey-sales-rise-5-8-1414582768
Ferdman, R. (2014, July 18). Your chocolate addiction is only going to get more (and more, and more) expensive - The Washington Post. Retrieved from http://www.washingtonpost.com/blogs/wonkblog/wp/2014/07/18/your-chocolate-addiction-is-only-going-to-get-more-and-more-and-more-expensive/
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