A business manager in a capital-intensive industry needs to monitor its own industry cycles because they routinely experience (A visual cycle of over investment, over capacity, and the price).
Elements that make capital-intensive industries prone to overbuilding:
A hypothetical example illustrating how the cost structure could induce huge swings in prices and profitability.
| mining company (VC = $25/ton, FC = $20/ton) | strawberry importing company (VC = $40/pound, FC = $5/pound) | |
|---|---|---|
| When the price is above $45 | keep producing because it is profitable | keep producing because it is profitable |
| When the price dips below $45 in a downturn | Little change to production. There is little flexibility because much of the cost is fixed. The company keeps operating as long as the price is not lower than VC, $25. | Decreased production. The company is flexible because much of the cost is variable. For example, it can cut production with layoffs. |
A capital-intensive company should include warning signs of new capacity in their industry in their early warning system.
Think contrarian.
| A manager should: | |
|---|---|
| When prices rise and competitors announce new expansion plans | Stop adding new capacity. Sock away cash and wait for the industry’s over-expansion to play out. |
| When writers gather up all the bad news at the bottom of the market | Pick up new capacity as troubled competitors offer up equipment and facilities at discounts. Do not move too quickly and wait for real distress by monitoring the financial conditions of weak competitors. |
Explan each of the following terms in your own words. The author explains the terms in the textbook. If necessary, you may also Google the term on the Web. Good resources include:
Explain the terms in your own words briefly.
Costs that can be decreased by cutting labor, energy, and raw material costs.
Costs that do not change in the short-term such as rent or insurance.
How much an asset decreases in market value over time.
Describe the characteristics of the following events briefly.
High oil prices in 2022 is mainly due to the Russia and Ukraine conflict. Due to this, oil supply and trade drastically slowed, which increased the prices.