Revenue, Cost Concepts, and Market Structure Essay

Revenue, Cost Concepts, and Market Structure Rachel Mitchell EC 561 August 2, 2010 Professor Laurie Gazzale Revenue, Cost Concepts, and Market Structure Thomas Money Service (TMS) originated as a consumer finance company in 1940, granting small loans to individuals for household needs. Over time, its services expanded to financing business loans and commercial real estate loans. In 1946, TMS made the decision to embark upon equipment financing and a subsidiary named Future Growth Inc. (FGI) was born. In 1951, an equipment manufacturing company was bought because of the high demand of forestry and construction equipment.

This purchase allowed FGI to build, sell, and finance their own brand of building and forestry equipment; therefore, they withdrew from financing other brands. For 67 years, FGI’s profits grew. Recently, the economic struggle in America has dropped their profits down 30% and caused a layoff of one-third of their employees. Home sales have declined as well as business within the construction industry altogether. One area that still remains strong is the demand for new hospital and nursing home buildings.

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The purpose of this proposal is to provide TMS and FGI with some recommendations for increasing revenue, obtaining ideal production levels to maximize profits, and reducing costs while taking into account the changes the industry has seen in demand over the last year of declining business. Increasing Revenue Due to the economic downturn, FGI has repossessed more than 500 pieces of equipment in the last year. Currently they are bundling the equipment to sell at an average price of $1732 per item. According to the demand data, FGI will only be able to sell 182 pieces of equipment at that price, enerating a profit of $315,224. |Price ($) |Demand (Units) |Revenue ($) | |1990. 1 |123 |244,782. 3 | |1732. 0 |182 |315,224. 0 | |1634. 3 |350 |572,005. 0 | |1252. 0 |380 |475,760. 0 | |732. 1 |400 |292,840. 0 | |622. 3 |456 |283,768. 8 | This leaves a surplus of goods.

If FGI were to unbundle their repossessed inventory and sell each at a price of $1634. 30, they would be able to sell a total of 380 pieces of equipment, which would create an income of $572,005. Although they would still have a surplus of approximately 120, they would receive the greatest reimbursement for what they do sell by setting the price at that level. Perhaps at a later time, they can market the additional 120 pieces of equipment on hand and sell them at a price of $1990. 10, producing an additional $244,782. 30 in revenue. The need to repossess pieces of equipment is not a good sign for a company such as FGI.

It signals a declining economy with buyers becoming scarcer to come by. By selling these goods at an optimal price for increasing revenue, the company can make up for lost business. Ideal Production Levels for Maximizing Profit To maximize profit, the marginal revenue gained from producing an additional unit of output must exceed or remain equivalent to the marginal cost of that same unit. According to combined production cost chart for both construction and forestry equipment, at 12 units of output the marginal revenue of $400 is still higher than the marginal cost of $174.

From looking at the patterns throughout the chart and assuming that no drastic changes will occur, one can identify the marginal revenue for unit 13 to be $200. The marginal revenue for each unit has decreased systematically by $200 with each additional output. When given a marginal cost that fluctuates more frequently, it is harder to predict what will happen. One could assume that it will follow the pattern of increasing despite being able to tell by how much it will rise. From the 11th unit to the 12th, marginal cost increased $29.

If the increase from the 12th to 13th is roughly the same, at that point, marginal cost will be greater than marginal revenue. Therefore, it is beneficial to stop producing at 12 units of output. |OUTPUT |PRICE |MARGINAL REVENUE |TOTAL REVENUE |TOTAL COST |MARGINAL COST |Profit (Total | | | | | | | |Revenue-Total Cost)| |1 |$2,600. 0 |$2,600. 0 |$2,600. |$1,050. 0 |$60. 0 |$1550 | |2 |$2,500. 0 |$2,400. 0 |$5,000. 0 |$1,100. 0 |$50. 0 |$3900 | |3 |$2,400. 0 |$2,200. 0 |$7,200. 0 |$1,145. 0 |$45. 0 |$6055 | |4 |$2,300. 0 |$2,000. 0 |$9,200. 0 |$1,200. 0 |$55. 0 |$8000 | |5 |$2,200. |$1,800. 0 |$11,000. 0 |$1,262. 0 |$62. 0 |$9738 | |6 |$2,100. 0 |$1,600. 0 |$12,600. 0 |$1,335. 0 |$73. 0 |$11265 | |7 |$2,000. 0 |$1,400. 0 |$14,000. 0 |$1,423. 0 |$88. 0 |$12577 | |8 |$1,900. 0 |$1,200. 0 |$15,200. 0 |$1,517. 0 |$94. |$13683 | |9 |$1,800. 0 |$1,000. 0 |$16,200. 0 |$1,637. 0 |$120. 0 |$14563 | |10 |$1,700. 0 |$800. 0 |$17,000. 0 |$1,772. 0 |$135. 0 |$15228 | |11 |$1,600. 0 |$600. 0 |$17,600. 0 |$1,917. 0 |$145. 0 |$15683 | |12 |$1,500. 0 |$400. |$18,000. 0 |$2,091. 0 |$174. 0 |$15909 | |13 |$1400. 0 |$200. 0 |$18,200. 0 |$2294. 0 |$203. 0 |$15906 | Note: Highlighted figures are dependent on an estimated marginal cost of unit 13, assuming that marginal cost increases from unit 12 to 13 in the same amount as it did from unit 11 to 12. The same conclusion can be made simply from analyzing the data collected in the profits column.

If the assumptions made are correct, profit will decrease by $3 when the 13th unit of output is made. Although this is not a significant amount of money, it is a key indicator that profits are beginning to decrease and that production of any more units would not be in the company’s best interest. Reducing Costs Although fixed costs are one thing that cannot be altered very easily, variable costs can be adjusted to help maximize profit. A large proportion of variable costs come from a company’s advertising.

Recently, FGI has decreased the amount of money spent toward advertising, opting to narrow its commercial air time down to a Super Bowl slot and a few other sporting events. While limiting when their ads are seen is a good time tactic, limiting how and what they advertise during those times may also prove beneficial. Because the housing market has seen a drastic downfall, FGI should look to obtaining contracts with other areas of the industry that still have demand for their services. Hospitals and nursing homes are still in demand of new buildings.

Therefore, advertisements should be tailored to attract builders in this portion of the industry. FGI may also benefit from running ads that sympathize with animal activists and those who lost their homes due to floods and fires. Creating alliances with those currently rebuilding from natural disasters would create a relationship of trust between FGI and the public, alliances with not only individuals, but also builders and insurance companies. Discounts could even be awarded to those who suffered such devastation. By increasing their customer base, FGI is sure to increase profits even if it is at a lower price per unit.

Because there are many substitutes for FGI’s equipment, creating bonds such as these would be a good way for FGI to set itself apart and reduce elasticity. The Future for FGI Despite hardships from the struggling economy, FGI has many solutions for increasing revenue, maximizing profits, and reducing costs. To increase revenue, FGI should take advantage of the inventory they have repossessed by reducing the price per item. For profit maximization, they should stop producing additional output when the marginal cost of an extra piece of equipment exceeds the marginal revenue for that same unit.

FGI has already begun to reduce costs by cutting back on advertisement. By utilizing both the quantity of the company’s advertising dollars and the quality of the advertisements themselves, FGI can reduce costs and receive the most out of their money at the same time. These recommendations were made based on the provided data and the using basic economic tools to configure methods for FGI to successfully manage its company as effectively as possible given the status of the economy.

FGI has taken extensive pride in its ability to grow in terms of profits each year and maintain its employee workforce until recently. These recommendations should help to prevent future reduction in growth and workforce instability. References McConnell, C. R. , Bure, S. L. , & Flynn, S. M. (2009). Economics:  Principles, problems, and policies (18th ed. ). New York:  McGraw Hill/Irwin. Thomas Money Service Inc. Scenario. University of Phoenix Material, ECO 561. https://ecampus. phoenix. edu/classroom/ic/classroom. aspx.

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