Research Paper
Example week 5 – group assignment
Article
Alexander, Blayne and Stelloh, Tim,“Clorox ramps up production of wipes, disinfectants in fight against coronavirus” | NBC News, 6 May 2020
Summary:
Clorox has seen a 500% increase in demand in the first quarter of 2020. The company has produced 40 million more products than for the same period last year. In order to accomplish this, Clorox is running its five plants 24/7. To do so the company has hired an additional 263 workers and has paid out bonuses to many production workers. This has all been accomplished while ensuring the safety of its employees. In addition to more workers the pace at which raw materials are received has also increased as has the efficiency in shipping the products. Many of Clorox’s workers view their jobs more favorably as they feel they are part of the mission to fight the virus.
How does this relate to our material this week?
Colrox’s market structure is oligopolistic competition as there are few producers of cleaning disinfectants that offer slight variations to their competitors products. Clorox competes based on brand differentiation. In the short run, Clorox is able to increase labor and raw materials to produce the products. These are variable costs. As Clorox adds more employees, each will result in marginal product. The company will also realize an increase in costs, which may increase the average total cost and marginal cost. At some point, there will be a diminishing marginal return as there will not be sufficient work for the additional employees due to constraints on plant size. In the short run the company is unable to adjust capital such as plant size and equipment, which are fixed costs in the short run. In the long run both are able to be adjusted. At this point, the company will hopefully experience economies of scale where the average cost of producing the product decreases while production increases. The article discussed their ability to process more, quicker and as safe as before. This is an example of the technology factor of production, where they must have made process efficiency improvements to handle more material and more production.
How will this translate companies’ Balance Sheet?
The balance sheet could be affected in a number of ways:
In the short run, there will most likely be a decrease in cash as more workers are paid and more materials are purchased. There will also most likely be an increase in payroll taxes and wages payables.
Because there is not enough supply, accounts receivable (we are not selling on credit because Clorox does not have enough to sell) and inventory would decrease until which time as consumers find a substitute good.
Property, Plant & Equipment will only increase in the long run. There will be no change in the short run. The expansion could be funded through long-term debt or retained earnings.
Given that Clorox is a respected name brand, if it were sold, it would sell for a premium price. The purchase price would be above the book value of the assets resulting in goodwill for the purchasing company. This is because market value exceeds the book value of the assets. Additionally, if Clorox purchased a competitor, the goodwill on Clorox’s balance sheet would increase.
How will this translate to companies’ Income Statement?
Because of the increase in demand for cleaning products, there should be increased revenue as well as cost of goods sold (because they are variable). Selling expenses will most likely follow suit, however, administrative expenses will most likely not experience the same percentage increase (because the majority of them are fixed), resulting in increased operating income as a percent of sales. The additional operating income will lead to additional taxes. These effects on the income statement relate to the company’s explicit expenses, not implicit expenses which are only taken into account when evaluating economic profit. An example of an implicit cost that would not make their way to the income statement profit would be if there are new employees hired to keep us with demand. The cost of training is an implicit cost, that new employees and the manager are not using their time on production as normal. Overtime being worked for salaried employees such as managers is an implicit cost because they are not being paid for overtime. The rent that clorox could have earned if they were able to rent out some of their space but now they are using it 24/7 is an implicit cost.
Calnan, Canning Fall 2020, Economics with a Financial Twist
