Operational Decision: Tinker's Toys Tinker's Research Paper

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Currently, 100 workers, working 20 days are producing 6000 units. That means that each worker is producing 6,000 / (100*20) = 3 units per day.

Given only those financial figures that have been provided, it is impossible to do a complete financial calculation. A huge part of the decision making for this scenario depends upon the marginal cost of additional production. Marginal cost refers to the cost of producing one more unit of a product (Sullivan & Sheffrin, 2003). In economies of scale, the greater the production, the lower the marginal cost, so that increasing production increases profit. However, there is not enough information to determine if this is true for Tinker's Toys, and, if so, to what number it would be true.

Improving Profitability

Without knowing the fixed costs and worker capability, it is impossible to determine some critical financial numbers. Can workers reasonably increase production or is a 3 unit per day production capacity the maximum that can be sustained with the current workforce? How high are fixed costs? Would an additional $10,000 in orders be sufficient to cover fixed expenses, or is the company losing tens of thousands in fixed costs each month? If so, where are those fixed costs and can they be reduced? Without the answers to these questions, it is impossible to make solid recommendations about improving profitability. However, assuming that marginal costs decline and will continue to decline with increased production so that there is potential for increased profit, I would recommend the following measures; profit mapping, identify customers who should be in the company's sweet spot but are not and focus on sales to those customers; and implementing a net profitability-based sales compensation system (Byrnes, 2011).

The first thing that I would do is form a profit map. "Profit maps show exactly where profit is flowing and where it is lost" (Byrnes, 2011).

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A profit map is far more detailed than figures that yield net profits, and can help determine the biggest expenditures and whether those can be reduced. Therefore, someone needs to sit down and examine all of the costs for the units and then sit down and look at all of the costs associated with the various customers. Sometimes the biggest customers, who are assumed to be the most valuable, are actually the least profitable because they may have higher return rates, greater shipping costs, or higher associated sales costs because of their size. Once the company has examined each individual customer, it can then look at those customers that should be the most profitable but are not, and attempt to increase sales to those customer, this increase in sales should be done through a sales force whose commissions are not based solely on the number of units sold, but on the profitability of each unit sold.

Continuing Operations or Ceasing Operations

Without information about fixed costs, it is impossible to suggest whether the company should discontinue operations. Even fixed costs are frequently not fixed. However, if the fixed costs are truly fixed and increasing production would increase profitability per unit, then it does not make sense for the company to continue operations. However, it is important for a business that closes to do so in a responsible manner, which leaves open the possibility of re-starting the business, makes executives and management more attractive to other employers, and does not abruptly leave employees without jobs. The company should inform customers that it will cease taking new orders in a specified period of time, notify employees that the company will be closing on a specific date, and fill all existing orders two weeks prior to that date......

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