A few years ago, the ACME Manufacturing Company installed automated robots worth

Question

A few years ago, the ACME Manufacturing Company installed automated robots worth millions of dollars in its furniture assembly lines, believing that the robots would improve profitability and increase the efficiency of the manufacturing process. However, ACME lost many millions of dollars more despite the fact that it was able to make furniture faster using the robots. Why would this happen? What could have caused this situation? ACME then tried to increase profits (operating income) by making more products that could be sold in a period. Should this tactic be used to increase operating income? Would this happen in service companies or only manufacturing companies? Explain.

Explanation / Answer

The introduction of robotic system involves substantial installation and fixed costs. The ACME make may not be able to have the profitability if it could not cover the huge fixed costs incurred in installation and operation of the robots.

An attempt to increase operating income by making more products can be successful only if ACME is able to create the market of that products in a wider area or it could increase its market share. In this way, ACME can increase its profits to be sufficient enough to cover its fixed costs.

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