Overview
250 word replies with one reference
Jacob
Organizations experience many expenditures while producing their products or services. These expenses can often be classified as either fixed or sunk costs. Fixed costs are often related to reoccurring expenses that are not directly related to producing a product. These costs do not change when the number of goods produced changes. Some examples include rent, insurance, property tax, or utility bills like electric, water, heat, or internet (Hayes, 2024). On the other hand, sunk costs often referred to expenses that have already been incurred and cannot be recovered. These costs can be associated with items like office supplies, new equipment, or facility repairs (ProductPlan, n.d.).
A recent product I have recently purchased is paper towels. Although they were off brand, I will use Bounty paper towels for the example and explain at a high level the manufacturing process for paper towels (Bounty, 2019). The main raw material used in paper towels is softwood chips. These wood chips undergo a chemical churning process that separates the wood fibers and creates a wood pulp, which is used in products like printer paper, carboard, and paper towels. The pulp then must be cleaned and bleached to remove any harmful components and give it a pristine white color. Finally, the pulp is bonded and pressed into textured sheets. After the manufacturing process, it undergoes the standard packaging and distribution process than many other products experience (Lacoma, 2017).
As explained, for a simple product like paper towels, there are numerous processes and factors that contribute to its production. Fixed costs associated with the production of paper towels are pretty standard for any product. These include items like rent and utility costs for the manufacturing plants, warehouses, distribution centers, and offices. Paper towel sunk costs expenses are much more involved. First, the softwood chips are a consumable raw material that must be purchased. The equipment and machinery associated with the chemical churning process, the cleaning and bleaching process, the bonding and pressing process, as well as the packing process must be purchased. Additionally, there are items like office supplies, pallets, forklifts, and shelving are included in sunk costs. Even items like marketing campaigns could be included as well.
Reducing both fixed and sunk costs can be difficult. Developing organizational procurement standards for making purchases is one effective way to mitigate unnecessary purchases or buying from more expensive vendors. This goes along with making educated purchases and doing some research before buying items. Bounty could also purchase their building and land to mitigate rent costs.
References
Bounty. (2019). Bountytowels.com. https://bountytowels.com/en-us
Hayes, A. (2024, June 1). Fixed Cost: What It Is and How It’s Used in Business. Investopedia. https://www.investopedia.com/terms/f/fixedcost.asp
Lacoma, T. (2017, April 24). Process For Making Paper Towels. Sciencing. https://www.sciencing.com/process-making-paper-tow...
ProductPlan. (n.d.). Sunk Cost. Www.productplan.com. https://www.productplan.com/glossary/sunk-cost/
drew
Throughout each production process, regardless of product or service, that occurs suck and fixed costs along the way. Sunk costs is a cost that is lost forever once it has been paid (Baye and Prince, 2022). For example, businesses that pay for marketing they treat that as a sunk cost as any amount you spend cannot be recovered directly. On the other hand, a fixed cost is an expense that doesn’t change based on quantity of goods produced and can be anything from rent to wages paid.
Recently, I made the decision to upgrade my wireless earbuds and purchased new AirPods 4. In the end, battery life, noise cancelling options, and compatibility were main reasons for the purchase. As with other apple products, the AirPods have many similar costs associated with production as the iPhone and iPad. When looking at fixed costs, expenses that do not change with production, Apple maintains consistent costs with factory rent, manufacturing equipment but in some cases the biggest fixed cost is the money spend on wages and salaries. Interestingly, as long as Apple spends the same amount on research and development each year, they can generally treat it is a fixed cost. Also, as apple creates new products, whether they are successful or not, there is no way of getting any direct reimbursement of the money spent on development of new products or features making it a sunk cost. When looking at AirPods and additional sunk costs, one major one found is with marketing and promotion. Money paid to marketing channels is a cost that is lost forever once it is spent. Working with featured artist and athletes to become the face of Apple, while beneficial, is a prime example of a sunk cost.
If Apple was looking to limit fixed and sunk costs would be to maintain focus on the future and be willing to cut losses before it is too late. To lower certain fixed costs, Apple could continue to work with third parties to limit costs around production and transportation while maintaining their focus on development and future research. Overall, finding new ways to reach consumers without large spending on media and partnerships could help Apple limit marketing costs, though their brand loyalty and recognition makes many changes unnecessary as they are already a industry leader.
Baye, M. R., & Prince, J. (2022). Managerial Economics & Business Strategy. Dubuque McGraw-Hill Education.
AirPods 4. (2024). Apple. https://www.apple.com/airpods-4/