AQR Ltd is a company which manufactures electronic equipment for the domestic market. The company employs one hundred workers who produce six thousand units of the electronic equipment. This number of items is produced on a monthly basis with employees working for twenty days per month. These units are then sold at $32 per unit.
Environmental Factors Influential to the Company’s Performance
Various environmental factors have a great impact on the company’s performance. These include demand for the company’s products; the cost of production inputs among others. If demand for the company’s products increase significantly, the company will register good performance and if it falls; the performance of the company would also be poor. Moreover, if the cost of inputs in the production process like labor increases significantly; the company would perform poorly because its costs of production will have increased relative to the revenue being generated from the sale of its product. At this point, it is important to note that among environmental factors that are very influential on the company’s performance are the workers’ unions and the level of influence they have over the operations of various companies. If these unions are very powerful; they are most likely to compel organizations to increase the amount wages and salaries paid to employees thus increasing the company’s cost of production and reducing its profit significantly. Factors that have a greater impact on the AQR Ltd’s operations are those associated with an increase in the cost of production. These include the influence the workers unions’ activities as well as other lobby groups. This is because such unions have the ability to increase the cost of labor which is a very important factor in a company’s production process. Consequently, any factor that can increase the cost of labor would significantly influence the company’s operations and especially its management’s decisions on whether to continue with its operations or not
The Company’s Financial Performance
The company’s monthly revenue is (6000 units×$32) = $192000
The company’s cost of labor per month is (100 workers× $1400 per worker) = $140000
The company’s cost of other variable inputs per month is (20 days×$2000) = $ 40000
How AQR Ltd Can Improve Its Profitability
The company can only improve its profitability through putting in place measures aimed at reducing the costs incurred in the production of these electronic equipments. Once the company’s costs of production have been reduced, the company will be able to make profit which would benefit stakeholders like shareholders among other investors who would therefore see their investments grow substantially. Once the company has began making profit, it would have enough funds to engage in research and development in order to come up with high quality and innovative products which would guarantee customers value for their money.
The cost reduction process would involve the following steps:
- Examining the company’s production processes to identify any inefficiency
- Identifying and replacing or repairing inefficient production equipment and machines
- Identifying poor performing employees and taking them through necessary training programs
- Setting in motion the new production system with efficient equipment and adequately trained employees
- Effective implementation of the above cost reduction process to generate profits for the company
Circumstances under Which the Management Should Discontinue Its Operations
The management would only discontinue the company’s operations if even after implementing the above plan, the company continuous to register poor financial performance. The above plan would have been aimed at reducing the company’s operational costs and therefore bring about better performance in terms of increased profitability. The company’s management would have instituted cost reduction measures like improving the efficiency of its equipment and therefore reducing wastage of resource on faulty machines. Another cost reduction measure would have been targeted at employees especially those who had been delivering unsatisfactory output due to poor skills. By taking these employees through training sessions, the company’s management would have taken a very important step in improving the quality of output from such employees. This is because training plays a very important role in not only improving the quality of an employee’s output but also in increasing the quantity of his output. However, if the company’s costs of production do not fall even after these measures, then the only option would be for the management to discontinue the company’s operations. Confronted with such a situation, the management should dispose off the company’s assets and use the proceeds to invest in a venture that is more viable than the production of electronic equipment. This would ensure that these funds are generating an income even though AQR Ltd’s operations would have been discontinued.
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