Managerial Economics - BP Oil Company Limited - Case Study Example

Name Student Id Lecturer’s Name Date Part 1 Introduction The Company we are giving our services BP Oil Company Limited which deals with the drilling, distribution and selling of petroleum products. It is one of the biggest oil companies in the world because it accounts for over 17% of the total world oil distribution. The company has been incurring high production costs in the past few years and this has been leading the company into losses. The company has not been able to expand and serve the growing world market. The high cost of production has been as a result of high fixed cost and static variable cost, therefore, there is need for the company to find a solution so as to lower its production cost. This will help the company to be able to maximize profits by cutting its costs. Year Cost in billions USD 2009 10 2010 15 2011 20 2012 25 2013 30 According to the table above the cost of BP oil company has been experiencing increase in the cost of production from the year 2009 where the increase has been around USD 5 billion and this has been the trend all through. This means that there has been reduction in profits for the company. The increase in cost has been influenced by increase cost in drilling and where it has been forced to pay millions in damages for oil spills. In the last financial year the company profits were USD 150 billion down from USD 180 billion. This reduced profits means that the company cannot properly plan for its future activities because they are not aware of the profits they will earn in the coming years. According to the above graph it is evident that the company costs have been continuously increasing the past few years. This is not a good trend for a company because it will not allow the company to grow and expand its market share. This is a large share of the company profits. Solutions to the problem Economies of scale The problem of cost production can be solved through the use of economies of scale. Economies of scale can be defined as the cost advantage a company gains when it increases output of a product. The advantage arises because of the relationship between quantity produced and fixed costs incurred per unit. This means that they move in different direction. The more the quantity produced the lower the fixed cost incurred per unit. The reason behind this is that the cost is shared over a large number of outlets. Economies of scale can also lead to a reduction of variable costs per unit. The reason behind this is that there is increased efficiency that comes with economies of scale. There are two types of economies of scale, internal and external. Internal economies of scale are those arise from within the company and external economies are those arise outside the company, for example, the advantages of industry size (Pug and Lehman, 2013). This means that as the company grows it will be able to reduce its overall cost because the cost incurred in producing each and every unit is reduced over time. Therefore, economies of scale may lead to economic growth because of reduced costs and increased units. Economies of scale will therefore, help a company reduce its production cost incurred per unit. The total cost a company incurs will reduce as a result of reduced average variable cost and average fixed cost. The company uses the same resources to produce increased units which mean there is more efficiency (Pug and Lehman, 2013). The above diagram shows the relationship between cost and the production rate of the company. It is evident that at 10 units is at 0.8 dollars per unit. This cost reduces as the company increase the number of units it is producing using the same resources. The more the company produces the lower the average cost per unit. There are different factors which can lead to realization of economies of scale. They include the following; Specialization and division of labour A company that assigns specific tasks to its employees has a higher chance of achieving economies of scale. This can be achieved through training employees to perform specific tasks in the company. This will help the employees become more efficient and this will increase their productivity. This will also help reduce the time used to produce a given number of units. Technical A company incurs high fixed chances depending with the nature of the activities it carries out. BP Oil Company being a diaper production company needs to reduce the fixed cost per unit. This can be achieved when the company produces in large scale. Bulk buying A company that buys in large quantities reduces its costs such as transportation cost. The company can ensure that when it orders for raw materials are delivered in large quantity. The company should also supply at large quantities this will help reduce fixed cost per unit. This will help realise economies of scale. Marketing economies A large company will be able to carry out a successful advertisement campaign because it will be able to cover high sunk cost. This will not be the case with a small company. Therefore, BP Oil Company will benefit from producing in large scale. Assumptions of economies of scale The economies of scale assume that Marginal cost equals Average Variable Cost and they are constant. This means MC=AVC=Constant. This means that marginal cost and average variable cost do not change with the scale of production. Another assumption is that average fixed cost declines as the company achieves economies of scale. This means the more the company produces the lower the average fixed cost. This leads to the other assumption in the long run where average cost reduces as the company increase its production at a particular given time. The assumptions means that the company should ensure that it utilizes the available resources to their full capacity because this will lead to increased production and this will push the average variable cost (AVC) down as well as the average cost (AC) (Pug and Lehman, 2013). Therefore, as the company scale of production expands the company becomes more profitable as result economies of scale. The company should ensure that it does not compromise the quality of the products it produces as its increases its production. The production rates of a company determine the average variable cost (AVC) and Average Cost (AC). Therefore, the company strategies should be aimed at reducing the two types of cost as it produces high quality products (Pug and Lehman, 2013). Benefit to the company Large scale production means that the company will be using the same fixed cost and marginal cost to produce increased products. This will help the company to increase its profits as a result of fully utilizing their resources (Pug and Lehman, 2013). Alternative solution The company can use opportunity cost as their second solution to the problem. Opportunity cost means the second best alternative foregone. In this case the second alternative will be to close operation in some of the countries. This option would enable the company to cut down its cost in terms of wages and rent. This will allow the company to concentrate operations in the country it is earning high profits and with low profits. The benefit of this option will be elaborated below. In closing some of its operations in the countries it is not earning profits in a period of 5 years, the company will be saving as follows. Year Cost in billions USD 2009 5 2010 5 2011 10 2012 10 2013 5 This means that in the year 2009 the cut will have saved a cost of 5 billion USD if it employed the alternative of opportunity cost. This would have portrayed in the following year. The cost in year 2011, 2012 would be 10 billion USD. The cost in year 2013 would have been 5 billion dollars. This shows that the company would have saved 75 billion USD for a period of 5 years. This would have been part of the company profits and could be used to improve operations of the company in the existing outlets and countries. It is evident that the company will be saving a lot in using the second option but this should not be the decision it will take. This option will have a lot of costs involved because there are a lot of people who will lose their income as a result of closing some outlets. The company should choose the option that will not have a lot of effects and the one that highly benefits the company. Economies of scale will a lot of benefits to the company and therefore, it is the best alternative and solution to the problem. Mind Map The discussion will revolve around this mind up so as to identify how the company can achieve economies of scale so as to move away from losses. Assumptions of economies of scale should be put into consideration before making any decision. This will help the stakeholders make a conclusive decision that will benefit the company. Therefore, the benefits of economies of scale should be explained and elaborated so as to make an informed decision. Assumptions help that the company to understand the concept they are intending to use so as to avoid taking the company into a great mess. Therefore, the decision should be moving the same direction with the assumptions of economies of scale. The concept will be able to benefit the company in different ways because large scale productions mean that the company is becoming more efficient in its production. Therefore, large scale production will help reduce production cost per unit at a given particular time. The failure to put this into consideration might lead the company into diseconomies of scale where the company is incurring more costs than what it is producing. This means that the company is earning losses. Part 2: Reflections Reflection 1 I was hired as a consultant so as to help BP Oil Company to reduce it production cost. The company required a concept that will give a solution to the existing problem. The company wanted to increase its production as well increase its efficiency and move to profitability. The company was earning losses and they were looking for a solution that will ensure that the problem has been eliminated. Therefore, as a consultant I was required to help the company use its existing resources to come up with a solution. The solution was to be aimed at increasing efficiency and increase profitability. When I started working on the project there was a lot which was going on in my mind but I really wanted to be successful in this project. The company did not provide me with enough information to be able to establish the cause of the problem affecting the company this made me unsatisfied. This made to raise the issue to the company top management and they were very cooperative and I was accorded the necessary support. This made me satisfied with project because I had a lot of information which helped me to come up with a solution that I would suggest to the company. This being my first big project I learnt a lot that would help to be successful in future projects. I learnt on how to widen my research skills so as to establish any problem and to come up with the best solution to such a problem. I have also learnt that time management is very important for the success of any given project. Working on this project has highly helped in gaining experience in working in similar projects in future. The project has helped me to think objectively in solving any given problem. We worked on the project as a team of three members and each group member had a part to play in the project. The team was very cooperative and each member was successful in accomplishing their tasks and roles. Every group member was a good time keeper and this helped to accomplish the project within the stipulated time. We had agreed to be meeting thrice a week so that we can update each other on each member’s progress, one of the group members could not turn up for all the meetings and this was very hard on the other members. We had to be patient with him and work with his schedule. In handling a future project I would involve more people on the project because the project involved a lot of research and yet the time line given was very short. Therefore, the information that was used to arrive at the decision to use economies of scale as the concept to solve the problem was not enough and conclusive. If more people are involved the research will be conclusive and this will help to weigh all the options available so as to choose the best concept to solve the problem. Reflection 2 I was appointed as a professional in order to help BP Oil Company to lessen it production cost. The company was incurring a lot of losses and it really required to start receiving profits and also fully exploit its resources. Therefore, I was supposed to research and give solution to the existing problem and also recommend a concept that will resolve the issue. This perception should be designed at boosting the profitability and decrease the production cost of the company. Therefore, as a professional I was tasked to assist the company make use its current resources to find a resolution. The solution was intended to increase efficiency and increase profitability. I was very fretful and nervous to work on this project since it was my first big project. My former company was not very open with the provision of crucial material that would assist me in the establishment of the sole cause of the problem. The company top management was very helpful when I made them to understand that the support staffs were not cooperative. The material provided to me was not of much help to me when I was working on the project. The top management reaction was very helpful mainly because I was able to recommend a resolution. I got to learn a lot from this project and in future I would really wish to work in a project like this again. The project was very successful and it really helped me to advance my career as a specialist, mainly because, it helped me to advance my research skills in such a way that I was able to handle a lot of files and be able to identify little details. Human resource management is also very important in every project because a well coordinate workforce leads to positive results. The project also facilitated my acquisition of experience in project handling as well as eliminates the fear I had in handling big projects. We operated on the project as a team of three members. Each and every group member had a significant part to play in the project. The team was very supportive and each member was effective in completing their responsibilities and roles. Each and every group member was good at time management and this helped to accomplish the project within the postulated time. We used to meet thrice a week in order to update each other on each member’s progress, one of the group members failed to turn up for all the meetings and this was very tough on the other members. We had to be patient with him and work with his schedule. In upcoming events I would allot more time to each task so that it can be done in time in a conclusive way. This will let more research to be carried out and help make the right decision on which perception to propose to the company. It will also allow putting different decisions into practice and learning their results. The management will be given options to select from instead of providing a concept as the only solution. Reflection 3 I was employed as an expert so as to help BP Oil Company to cut its production cost. The company desired a concept that shall give a resolution to the current problem. The organisation required to increase its production while at the same time increasing its productivity and be able to move to cost-effectiveness. The organisation was experiencing losses and it was urgently searching for a solution that will make sure that the problem has been done away with. As an advisor therefore, I was supposed to assist the organisation to make use its current resources so as to come up with a lasting solution. The resolution was supposed to ensure that there is an increase in productivity as well as increase in profitability. I was very eager to commence on this project even if at the same moment I was quite tense. This was my very first huge project. The organisation failed to offer me adequate data that will enable me to be able to create the source of the problem facing the organisation this made me to feel quite discontented. I raised the issue to the organisation high management and they proved to be quite cooperative and I was rendered the essential support. I was very satisfied with project mainly because I had access to a lot of information that enabled me to come up with a solution that I proposed to the organisation management. I was able to learn a lot from this project given the fact that this was my first huge project. These information ad skills that I learnt would help to be successful in future projects. I was also able to widen my research skills and knowledge so as to be able to detect any problem as well as to come up with the greatest solution to such a problem. I have also learnt that time management is very important for the success of any given project. Working on this project has highly helped in gaining experience in working in similar projects in future. The project has helped me to think objectively in solving any given problem. We worked on the project as a team of three members and each group member had a part to play in the project. The team was very cooperative and each member was successful in accomplishing their tasks and roles. Every group member was a good time keeper and this helped to accomplish the project within the stipulated time. We had agreed to be meeting thrice a week so that we can update each other on each member’s progress, one of the group members could not turn up for all the meetings and this was very hard on the other members. We had to be patient with him and work with his schedule. In handling a future project I would involve more people on the project because the project involved a lot of research and yet the time line given was very short. Therefore, the information that was used to arrive at the decision to use economies of scale as the concept to solve the problem was not enough and conclusive. If more people are involved the research will be conclusive and this will help to weigh all the options available so as to choose the best concept to solve the problem. Part 3: Mind Map Mind Map The discussion will revolve around this mind up so as to identify how the company can achieve economies of scale so as to move away from losses. Assumptions of economies of scale should be put into consideration before making any decision. This will help the stakeholders make a conclusive decision that will benefit the company. Therefore, the benefits of economies of scale should be explained and elaborated so as to make an informed decision. Assumptions help that the company to understand the concept they are intending to use so as to avoid taking the company into a great mess. Therefore, the decision should be moving the same direction with the assumptions of economies of scale. The concept will be able to benefit the company in different ways because large scale productions mean that the company is becoming more efficient in its production. Therefore, large scale production will help reduce production cost per unit at a given particular time. The failure to put this into consideration might lead the company into diseconomies of scale where the company is incurring more costs than what it is producing. This means that the company is earning losses. The mind map will help in holding discussion and arguments on all the best options to the problem. The high cost of production has been as a result of high fixed cost and static variable cost, therefore, there is need for the company to find a solution so as to lower its production cost. This will help the company to be able to maximize profits by cutting its costs. The cost of production can be defined as the expenses that a company incur in the process of manufacturing a product or producing a service (Pug and Lehman, 2013). The production cost of BP Oil Company Limited includes labour and raw materials. Therefore, it is important for every company to establish the cost it incurs in producing a unit of its total produce. The cost of production is divided by the total units the company produces. Therefore, the company will be able to benefit from the concept of economies of scale because their cost of production per unit will be reduced. This will be a gain to the company because it will start earning profits. References Pug, I and Lehman, D. (2013). Managerial Economics. London; Blackwell Publishing. Read More