Bright Light Ltd
Bright Light Ltd is a company that manufactures fluorescent bulbs. This company has been in existence for one decade now and during this time it has proved to be a reliable organization since it has been producing high quality bulbs. In the past, the company has been able to capture a considerable market niche due to the energy saving nature of the bulbs. Some of the bulbs produced by the company use 20-40 percent less electricity compared to the incandescent bulbs. Even though the company produces high quality bulbs, it has not been able to acquire a competitive advantage over other firms in the same industry leaving it to occupy a small market share of 15 percent. Some of the fluorescent bulbs have the same features as the incandescent bulbs making them not compatible with the home fixtures. In addition, the current economic crisis has affected the profit margin adversely leaving the company at a breakeven level. The decrease in the sales level has led to the company contemplating to shut down its operations.
Current environmental scan factors
Given that Bright Light Ltd is considering shutting down, there are several factors that it should put into consideration. The company should evaluate whether it can be able to produce bulbs that are compatible with the majority of household fixtures. One characteristic that made incandescent bulbs become unpopular is that they were consuming a lot of energy and secondly they were incompatible with the majority of the household fixtures. Therefore, the company has an advantage in that the bulbs are energy saving, and the only consideration it should make is to analyze whether there exists any market after it produces bulbs that are compatible with household fixtures.
Another factor that Bright Light Ltd should consider is the possibility of reducing the manufacturing costs and still produces quality bulbs. Given that the current economic crisis affects the production cost by a high magnitude, cutting cost and coming up with sophisticated technology for production should be among the factors for consideration in the company.
If the company is unable to acquire a sophisticated technology, cutting production back should be considered. For instance, the managers should consider reducing the level of production by 400 per units and observe whether it will be profitable. Reducing the supply of the energy saving bulbs will stimulate demand and, as a result, prices will go up. In this way, the company will be able to recoup the production cost and instead of shutting down, expand their operations.
The company should consider the possibility of hiring less skilled workers in an endeavor to reduce the cost of labor. If it is possible to higher less skilled workers, then the company should not shut down. In addition, the company should consider whether it is possible to reduce any fixed or variable costs. If it is not possible, then there is no need of continuing operating and instead shut down.
The last consideration should be to evaluate the possibility of moving the production to a different demographic area. The consideration should be feasibility of the new region and whether there exists any market of the bulbs in the new region.
Evaluation
The calculations below help to assist whether making a decision to continue operations would be viable.
Employee Wages include;
100 workers x $70 per day = $7000 per day x 20 days per month
Employee Wages= $140,000/month.
Variable cost: $2000 per day x 20 days per month
Variable Cost = $40,000 per month
Considering that the marginal cost of the last unit is $30 and there are 6000 units per month produced, the total amount spent due to incremental unit of production will be
6000 (total units) x $30 per unit = $180,000 per month
Therefore, the total production cost will encompass the variable cost plus wages plus the production cost.
Total operating costs per month= $140,000 (wages) + $40,000 (variable costs) + $180,000 (production costs) = $360,000.
Each unit sells for $32/unit: $32 x 6000 = 192,000/month revenue.
Recommendations on how to improve profitability
There are several ways that Bright Light Ltd can implement in an endeavor to increase its profitability. Below includes some of the methods;
- Reduce the daily variable cost. This can be done by evaluating which costs can be eliminated or lowered.
- Reduce the fixed costs. This can be done by evaluating the inventory of fixed costs and then a determination of the costs that can be eliminated or lowered done.
- A consideration as to whether to reduce the number of employees, lowering employee wage or hiring new employees by paying lower wages.
- Consider raising the price of each bulb from the current price of $ 32 to $ 64 per bulb.
Circumstances for discontinuation
Given the situation in Bright Light Ltd, I highly recommend the company to discontinue operations. A complete evaluation of the fixed and variable costs indicates that the company is not even able to breakeven, and it is incurring losses. Nevertheless, if the organization is able to implement any of the above recommendations and lower the operating costs to $190,000 then it is highly recommended for the company to continue operations. If it is possible for the company to raise prices to $64 per bulb then, it is advisable to continue operations.
References
Choo, C. W. (2002). Environmental Scanning as Information Seeking and Organizational Learning. Information Research, 1-25.
Gupta. (2001). Managerial Economics. Noida: Tata McGraw-Hill.
McCann, B. T., & Froeb, L. M. (2009). Managerial Economics: A Problem Solving Approach. London: Cengage Learning.
