Question

The ABC Company executives decide that they will begin to produce more gidgets than gadgets. They previously had been producing 500,000 gadgets per year and only 300,000 gidgets. Yet they noticed that at the end of the year, there were still 100,000 gadgets left on the shelves and no gidgets. a. In an answer of at least one paragraph, explain why the company would want to produce more gidgets based on this market data. b. In an answer of at least one paragraph, explain why the ABC Company's decision involves a trade-off and identify what the trade-off is.

Answer 1

A.
The company has 100000 gadgets left in the stock and no gidgets. It is causing two types of losses to the company. The first loss is the stock out loss taking place due to the non-availability of the gidgets as the company cannot fulfil the new orders. The second loss is the surplus quantity of the gadgets that are left in the stock and it will be sold at discount. It will cause losses to the company as company may not recover even the cost of gadgets. Besides, there is a changing trend and people now prefer the gidgets over the gadgets. So, the company has made the correct decision to produce more of a gadget to cater the consumers.

B.
There is a tradeoff between the production of gadgets and gidgets. It is due to the many reasons, the first reason is the existing customer base of gadgets. So, gidgets are now in demand with increasing trends, but company cannot forego the gadgets market at once. So, production of gadgets will come down, but continue to produce. The second reasons is the competency and expertise in the gadget production. Due to this reason, the company has lower operating expenses for the gadgets that increases the overall profit margin. So, a tradeoff exists between gadgets and gidgets production. So, gadget production will come down and gidgets production will increase at a tradeoff point.