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

Answer:

Installing robots will also lead to increase in operating and other expenses such as maintenance of robots, installation of infrastructure necessary for robots etc. That is why ACME lost many millions of dollars more despite the fact that it was able to make furniture faster using the robots.

Making more products that could be sold in a period may be good option to increase operating income. Robots are able to provide more efficiency which will help to produce more product by incurring lessor cost. More Revenue and less incremental cost will result into increased operating income

This can happen both in service companies and manufacturing companies because robots may provide some operational help which could result into increased efficiency in service sector also. Then in the same way, services can be increased to generate additional operating income.

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