The owner of a printing company faces a choice between buying new equipment to expand her business and purchase withdrawal. The main elements and the consequences of both scenarios are represented in the table.
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|Potential Profits of the Printing Company|
|High sales||Low sales|
|With new equipment||$90,000||$40,000|
|Without new equipment||$70,000||$50,000|
Factors Influencing the Decision Making
Apart from purchasing additional printing equipment, the owner of the company should also take into account the demand for the production. Perspective is always significant for business (Morecroft, 2015). The first thing to do is to examine the current market situation and business rivals’ state of affairs. If the owner does not investigate the market, she will incur damage. It is important to consider whether the owner of the business will exploit new machines to the utmost under the circumstances. She should calculate the potential demand comparing it with the production capacity of the equipment she has at the moment and the total production capacity after the purchase. It might turn out that, in spite of the satisfactory demand, the total output achieved by the company will not be beneficial. Thus, making a decision requires the integration of several factors.
The Analysis of the Decision
In case the conditions are promising, the owner may risk it and buy new equipment. According to the analysis, the projected profits with high sales equal $90 000 if she makes a purchase. In comparison, she will gain $70 000 without additional mechanical facilities. Thus, the 28,57 % profit increase will be worth taking actions: $20 000 x 100% / $70 000 = 28,57%.
Factors Impacting the Company’s Profits
One should remember that proper decision making cannot be based only on suggestions. It is probable that the owner’s expectations will not meet the reality, whether they are optimistic or pessimistic: “companies face increasing regulatory complexity, changing customer and customer demand, evolving business models, shorter cycle times, and new resources of competition” and have to conform to the rapidly changing world (Edgett, 2014, p. 28). As a result, the owner should pay more attention to costs, particularly, the cost of the new equipment. It is equally significant to consider its useful life and warranties. What is more, the costs of regular maintenance should not be ignored: energy efficiency may become the key factor for success. Then, the owner of the business might need external help in implementing the new equipment. All in all, a complex of factors will influence the owner’s profits.
The Choice of the Equipment and its Impact
It is only natural that the owner will choose the equipment that is likely to work as much as possible. However, such machines must be quite expensive. One may suggest that the owner’s profit may initially decrease because of the purchase. On the other hand, it is impossible to derive benefit instantly: it is necessary to wait because a product or service will provide value in the long run (Tennent, 2013). Critically thinking, if the new equipment is of high quality and has a long useful life, the owner of the printing company will recoup the costs. What she can do at this stage is to depreciate and expense the new equipment for five years. She will probably prefer to expense the cost of the equipment in the first year, although there is a risk of losses or low profitability. Still, there is a chance that, after the manufacturer warrant expires, the owner will still make use of service. Should she take care of the equipment and comply with the service rules, such scenario is probable.
Edgett, S. J. (2014). Innovation: A critical capability. The European Business Review, January‐February, 28-30.
Morecroft, J. D. (2015). Strategic modelling and business dynamics: A feedback systems approach. Padstow, UK: John Wiley & Sons.
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Tennent, J. (2013). The economist guide to financial management. Bungay, UK: Profile Books.