This paper will describe the details of a fictitious business and will assess the current environmental scan factors while determining the factors that will have the greatest impact on plant operations and management’s decision to continue or discontinue operations. Thirdly, this paper will evaluate the financial performance of the company using the information provided in the scenario; consider all key drivers of performance, such as company profit or loss for both the short term and long term. Also, a recommendation as to how the company can improve its profitability and develop a brief plan to implement the recommendations. Lastly, this paper will assess the circumstances in which the company should discontinue operations while providing a set of reasonable rationales.
1. Briefly describe the details of the fictitious business that you created for this assignment.
The fictitious business in this assignment is named TopShop, which is an American multinational retailer with its main headquarters in New York. It is a high end fashion brand that specializes in fashion clothing, shoes, make-up and accessories. Currently, TopShop has 150 workers for its factory in New Jersey, and has hired a consultant to offer some advice that could help it make a decision as to whether it should shut down completely or continue operations. In addition, TopShop has 100 workers that produce 6,000 units of output per month (working 20 days / month). The daily wage (per worker) is $70, and the price of the firm’s output is $32. The cost of other variable inputs is $2,000 per day. The firm’s fixed cost is “high enough” so that the firm’s total costs exceed its total revenue. The marginal cost of the last unit is $30.
2. 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.
The environmental scan factor refers to the macro environment and is the activity of acquiring information about events and relationships in a company’s outside environment, the knowledge of which would assist top management in its task charting the company’s future course of action. (Aguilar,1967). Comparably, finance, marketing, and operations will have the greater impact on plant operations and management’s decisions in determining if the operation continues its business.
First, finance is responsible for acquiring financial resources at favorable prices and allocating those resources throughout the business, as well as budgeting, analyzing, investment proposals, and providing funds for operations. Secondly, marketing aims to analyze and determine consumer demands in the future, then selling and promoting its products and services. Thirdly, operations are responsible for production of goods and customer services in business. In addition, the production of goods or services supply could transform inputs into outputs (Michaels, 2011). Inputs such as capital, labor, and information are used to create goods or a service. That is why companies take measurements at various points in the transformation process and then compares them with previously established standards to determine whether corrective action is needed.
In other words, the three factors; finance, marketing and operation can work in the study and interpretation of the political, economic, social and technological (PEST analysis) events and trends which influence a business, an industry or even a total market. In summary, they have the greatest impact on plant operation and management’s decision.
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.
Topshop’s financial performance is in trouble. A decision was made to hire Mr. Blake Lively as a managing consultant to offer suggestions to improve Topshop’s financial performance. Based on the data given, Blake considered the following key drivers of performance and the financial analysis. The details are following:
100 employees produce 6,000 units in a month.
The price is $32
The total revenue per day = 6,000*$32 = $192,000
Daily wage per employee = $70
Total wage in one month = 20days * 100 employees * $70 = $140,000
Total variable cost = variable inputs + total wage in one month
= $2,000*20days+ $140,000 = $180,000 per month.
AVC=TVC/Q=$180,000/6,000=$30 per unit
Net income=Total Revenue-TVC=192,000-180,000=$12,000
Based on the analysis of data, Topshop could continue its operations in short term because the $32 price is more than AVC $30, and the revenue received per month is $12,000.
However, in the long term, Topshop should seriously consider the option of shutting down completely. The main reason being that the firm’s fixed cost is high enough so that its total costs exceed its total revenue, and the price must be less than AVC. Under this situation, the firm has no other recourse but to close its operation.
4. Recommend how the company can improve its profitability. Then, develop a brief plan to implement the recommendations.
Every business can improve its profitability by aiming to increase profitability, reduce costs, consider the price, and expand the market.
Buy more effectively
One of the most obvious routes to increasing the profitability is to buy more effectively. It makes sense to review a supplier base regularly and to determine if a firm can buy the same raw materials more cheaply or efficiently. However, it must be ensured that the cheaper raw materials will not reduce quality of product and service (He, et al., 2007).
Manage your costs
Close management of the costs can drive firm’s profitability. Most businesses are capable of fining some forms of waste to reduce, however it is important to be mindful and not cut costs at the expense of the quality of products and services.
It is a good idea to regularly examine the pricing. Changes in the marketplace may help increase the price without risking sales. However, it is essential to test any price increases before they are made permanent.
Expand your market
Moving into new market areas can transform a business and if handled correctly, can significantly increase the profitability. However, bear in mind that developing new products and services and selling in new markets can be risky – and mistakes can prove very costly.
5. Assess the circumstances in which the company should discontinue operations. Provide a rationale with your response.
To qualify for presentation as a discontinued operation, all of the following conditions must be met:
1. The operations and cash flows of the component have been or will be eliminated from the ongoing operations of the entity as a result of the disposal transaction and
2. The entity will not have any significant continuing involvement in the operations of the component after the disposal transaction
3. A description of the facts and circumstances leading to the expected disposal, the expected manner and timing of the disposal and the carrying amounts of the major classes of assets and liabilities included as part of the disposal group (if not reflected separately on the face of the statement).
4. The gain or loss recognized and, if not separately presented on the income statement, the caption in that statement in which the gain is included.
5. If applicable, the amount of revenue and pretax profit or loss reported in discontinued operations.
6. If applicable, the segment in which the long-lived asset or disposal group is reported.
Aguilar, F. J. (1967). Scanning the Business Environment. New York, NY: McMillan.
Michaels, R. J. (2011). Transactions and Strategies. 1st Edition. Mason, OH: Cengage Learning.
He, Y. Q., Chan, L. K. & Wu, M. L. (2007). Balancing productivity and consumer satisfaction for profitability: Statistical and fuzzy regression analysis Original Research Article. European Journal of Operational Research, 176(1), 252-263
Drake, M., Gerde, V., & Wasieleski, D. (2011). Socially responsible modeling: a stakeholder approach to the implementation of ethical modeling in operations research. OR Spectrum, 33(1), 1-26. doi:10.1007/s00291-009-0172-9
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