Question

Adding Value in Nike’s Production Line,” research your favorite brand of shoes (Nike, Adidas, New Balance, etc) and answer the following questions: Has the company experienced declining or increased cost attributed to computerization? Was variable cost increased or decreased? Were fixed cost increased or decreased.

Answer 1

Hello,

Taking a general view lets talk about cost structure of shoe companies. During recent trends it was observed that many old and traditional shoe stores were closing down. Interestingly new innovative shoe stores are flourishing and expanding. Most big shoe brands use cheap labour to make their shoes in bulk.

Talking about the cost structure, most shoe companies are experiencing increased cost. However, when we look out for bifurcation, it comes to light that it is in fact increase in fixed cost and decrease in variable cost. However, we have to understand that the rate of increase in fixed cost is higher than rate of decrease in variable cost. Why?

Let me give you an example to explain this. Suppose Company A makes shoes using labour intensive technique. Now with the digital age It wants to innovate, so it invests in machinery which helps in better design and improves efficiency. But for this machine it needs to pay lease rentals or other interest cost, as the case may be. But an important point to note here is that in long term, this company would get benefits. Even currently the company would get depreciation benefit.

The conclusion is fixed cost have increased and variable cost has decreased.

under different circumstances, the answer may differ.