Term Paper on "Economics of Cost and Production"

Term Paper 4 pages (1060 words) Sources: 5 Style: APA

[EXCERPT] . . . .

Economics of cost and production is a variable set of concerns that are specific to production, distribution and consumption of products. The achievement of getting a product to the consumer is a linear process and each step on the timeline requires different production and cost considerations. In general the short-term issues of production and cost involves reducing the cost of individual components, once the research and development stage has evolved to a usable product while the long-term production and cost issues can redirect economics to improve production through various means while still attempting to reduce short-term production costs. Short-term concerns are those dealing with the procurement of raw materials and potentially repurposing manufacturing machinery to meet the needs of a new product. While long-term production costing involves reducing set up time and even specializing equipment to manufacture goods more effectively. Long-term production and cost issues can also more effectively focus on prevention expenditures as presumably a product outlook is more healthy than it was at an earlier time and can absorb the short-term costs of such applications to help avoid unforeseen costs in the future. (Dorf and Kusiak, 1994, p. 861) the most effective production plan can simultaneously adjust to short-term production cost cutting while paying attention to the long-term production cost model. (Kee, 2001, p. 139)

In the short run, the costs relevant for evaluating a product are the flexible cost of resources used in its production, as well as the opportunity cost of using a bottleneck activity. In the long run, a company's management can adjust its contractual and managerial policies governing labor and overhead resources to meet its production needs. In effect, over an extended time horizon, a company s committed cost is subject to management control. The ability to change these costs over the long run transforms them from a committed into a flexible cost. Therefore, the incremental cost for evaluating the economics of manufacturing a product in the long run is the cost of all resources used in its production. (Kee, 2001, p. 139)

Kee, intones that the goal of a short-term bottleneck (when supply is outstripped by demand) is often essential to long-term production cost decisions, but cannot be relied upon as a long-term goal, as it is unlikely to continue when production is streamlined and the market demands are met by production. On the other hand this bottleneck situation, whether coerced or occurring naturally as the market demand increases above the ability to produce the product can assist the firm in making long-term production decisions, such as the implementation of automation and the redirection of resources to this product, as needed on a just-in time scale.

Failure to coordinate short- and longer-term decisions may lead to a series of short-run decisions that become the firm's long-term strategic plan by default. The problem with this ad hoc approach to strategic planning is that a series of short-run decisions may be suboptimal relative to a decision made initially from a longer-term perspective. Conversely, long-term decisions frequently have near-term implementation issues. Failure to understand and act on these issues may delay and/or impair the implementation of longer-term decisions. Consequently, short- and long-run decisions must be integrated… READ MORE

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