oil and gas companies
Costs of Production
This section of your paper has two rubric elements and will be between 1-3 pages long, depending on your use of graphs or tables. The first element in this section asks you to analyze the various costs your company faces, their trends over time and how they have impacted the company’s profitability. To gather data on this, you will want to go to your company’s annual report and look at their income statement. Here is a helpful video to help you understand how to read an income statement. You will notice that there are two section that deal with costs – the first is Cost of Goods Sold which is essentially the cost of the inputs, such as raw material and direct labor. For clothing manufacturer, that would include the cost of the cloth; for an auto manufacturer, it would include the cost of the steel. Then, there is the section called expenses and these are the costs beyond buying the raw materials. These include things like rent, insurance and overhead and other indirect expenses. For this section, you should include:
• Past 5 years (or more) of COGS, in a table or graph
• Past 5 years (or more) of Operating Expenses, in a table or graph (can be combined with table/graph of COGS)
• Explanation of any observed trends in either (ie: why is COGS increasing?) such as:
o Pricing history of major inputs, such as cotton for a clothing company, as applicable
o Change in how goods/services are produced – for instance, a change in major input such as moving from steel to aluminum
• Your analysis of how changes in either or both of these affected profitability – remember that accounting profit, which is what we are looking at here, is simply Revenue – Costs
The next rubric element in this section asks you to apply the concepts of variable and fixed costs to company for informing their output decisions. Chapter 11 examines the differences between variable and fixed costs, and you can review in this video the details about fixed and variable costs and how they apply to business output decisions. In this video, our textbook presents an example that shows how costs are distinguished between fixed and variable. This example will help shed light on how you can similar distinctions for your company. Also, you have already done some of this work in your previous rubric element. There you presented data on COGS and Operating Expenses. Generally, variable costs will show up in COGS and fixed costs will show up in Operating Expenses, so this gives you a head start. You can then use the data and your knowledge of fixed, variable and total costs from Chapter 11 to explain how your company will base their production level on the costs they face.
In this section, you will be examining three different aspects of the overall market in which your company operates. By overall market, we mean the market selling the product or service. For instance, there is a market for mobile phones or a market for jeans. Whatever product your company sells determines what market it is in. Note that the term market here does not refer to the stock market. In total, this section should be 1-2 pages long.
The first rubric element of this section asks you to discuss the market share for your company and its top competitors by providing details on current percentages for each company and describing the trend over time. The best way to show this would be to use some type of graph or table to show for the past few years (5 would show any trends, if you can find the data going that far back). To do this, you will need to find data on the market as a whole – for instance, if the market is computers, you will need to find the total value of computer sales in the US. From there, you can determine that share (the percentage) your company and the other top companies get from that total. For an example of how to do this, check out this video on calculating market shares. You may also find that industry magazines or other market researchers have compiled this information, so do look for those resources as well, to make your data collection easier. Once you have the data, you will want to see how your company has been doing. Having 80% of the market might sound great but if you see that the company had 90% of the market two years ago, then we have a different story. This is why showing the trend is so important.
The second rubric element in this section asks you to analyze the barriers to entry for your firm. This concept is explored in detail in Chapter 14 and you can review in this video the types of barriers to entry and their impact on the market. For the market your company operates in, you will detail the barriers to entry – some markets have more than other and some barriers are weaker than others. Your specific situation will allow you to explain how the existing barriers will either help insulate your company from competition or allow for competitors to break into the market.
The last rubric element in this section asks you to describe the market structure for your firm and analyze how this affects their ability to influence the overall market. Recall from Chapter 12 that there are 4 different market structures: Perfect Competition, Monopolistic Competition, Oligopoly and Monopoly. You need to categorize your company’s market into one of these four. Use the criteria listed in Table 12.1 on page 392 of the textbook and any supporting evidence you have presented so far. You can also use the four-firm concentration ratio and/or the Herfindahl-Hirschman Index (HHI) to support your conclusion. Here is a video showing you how to calculate both the four-firm concentration and the HHI*, and you can also review this on pages 453 and 497, respectively. Once you have determined the market structure, you can then analyze your company’s ability to influence the whole market based on this and their position within the market.
*this example uses the top 50 firms – you will not necessarily have to use that many.
This last section of your paper contains three rubric elements, where you will provide your recommendations for future actions based on the three different criteria. This section will be about one page long. In the first element, you will develop a recommendation for how the firm can manage it future production by synthesizing the data presented. This essentially is asking you to look at the data and analysis done in the supply and costs sections and make a suggestion how the company should produce in the future. The determinants of supply and specific costs trends that the company faces will determine what you suggest for their production moving forward, in terms of quantity and types of products.
The second element asks you to suggest how the firm’s position within the market and among its competitors will allow it to take the recommended action. This follows closely from your last element in the Overall Market section and you should use the evidence presented there to inform your recommendation here. Specifically, consider how the firm’s market power would allow them to make the suggested changes to production you mention above. You should also include here advice for how your firm can become stronger within their market.
The last rubric element asks you to describe how the firm can sustain its success going forward by evaluating trends in demand and price elasticity. Here you will revisit your analysis in the demand and price elasticity section to further provide suggestions for how your company can stay profitable. From pricing decisions to responding to changes in demand, your suggestions here should reflect your findings in those earlier sections. Be sure to include specific ideas for how the firm can remain successful, like new products to offer based on changing tastes, or a different pricing strategy to remain competitive. Your ideas should of course align with the rest of your analysis and the microeconomic concepts.