Will Bury Business Proposal ECO561 May 1, 2011 Introduction With the current economic condition, staying competitive and increasing profit is critical to maintaining a healthy business. Mr. Will Bury has developed proprietary technology that will allow him to convert printed text into a digital format for reading, or audio for listening. Because Mr. Bury holds the patent on his digital and audio converting technology, his business is considered a monopoly. This creates a barrier of entry to competitors and gives Mr. Bury an advantage.
However, while he has had his business for a few years, he has not been able to make it profitable enough to allow him to quit his full time job. In addition, he is not clear on how to market or price his product, (University of Phoenix, 2003). This paper will attempt to provide basic recommendations for increasing revenue, achieving ideal production levels, adjusting fixed and variable costs to maximize profit, and identifying methods to reduce costs. Discussion Increasing Revenue and Achieving Ideal Production Levels
Because Mr. Bury is operating in a monopolistic structure, his demand curve is downward sloping; the quantity demanded increases as the price decreases. Mr. Bury will need to determine the price elasticity of demand for his product. He will be able to maximize his profit by producing up to the output where marginal revenue equals marginal cost, (MR = MC), (McConnell, Brue, Flynn, 2009). He will however, have to include the opportunity cost of his $200,000/year salary plus benefits when calculating his total cost.
Opportunity cost is “the value of the next-highest-valued alternative use of that resource,” according to The Henderson (2010) website. Mr. Bury will also need to budget for advertising costs to promote his product to consumers. This will be even more critical as the expiration for his patent nears. Differentiating his product from his competitors as more companies enter the market will be necessary to maintain his market and profit share. Additionally, partnering with a major retail bookseller to sell his product for a share of profits could also greatly expand his business.
It could give potential customers the opportunity to see and test his product before purchasing, thereby greatly increasing consumer confidence. Adjusting Fixed and Variable Costs to Maximize Profit Currently, Mr. Bury has fixed costs that include a portion of his mortgage and utilities, (as he operates his business out of his garage). His variable costs include royalty fees for copyrighted book titles, his labor, and any materials he uses to convert the text and place them in a digital and audio format. In order for Mr.
Bury to continually improve the technology of his product, he will need to hire additional labor to run the conversion process and assist in researching and securing copyrighted material appropriate for conversion. While this will increase his variable costs, it will allow Mr. Bury to increase production, thereby increasing revenue. In addition, he will likely need to secure a more suitable location to operate his business. A larger space will be better able to accommodate additional workers and equipment. These additions will increase his total costs and will factor into the price he sets for his product. In order for Mr.
Bury to determine an appropriate price, he will need to add all of his variable costs then divide by the number of units sold. This will give him the cost per unit. This cost should remain constant, regardless of how few or how many units he sells, (Business Owner’s Toolkit, 2010). Methods for Cost Reduction As Mr. Bury’s business grows, he should invest in technology that will allow him to reduce the conversion time for each book and increase the opportunity for mass production. While initially these start-up costs will increase his total costs, eventually they will lead to lower average costs of production.
The Economies of Scale concept could help Mr. Bury to operate a more efficient business, which would produce more profit, (McConnell, Brue, Flynn, 2009). Additionally, Mr. Bury could secure several unskilled laborers at a minimum per hour rate to conduct the conversion process. As the business and workforce grows, it will allow Mr. Bury to spread advertising and product development costs over a larger number of products. Finally, Mr. Bury should invest in a website to not only promote and advertise his products, but to enhance sales.
Allowing consumers to preview and purchase products online will streamline the ordering process and reduce labor costs. Process for Business Recommendations Recommendations made in this proposal were based on sound economic concepts. By determining Mr. Bury’s company was a pure Monopoly, as defined by being the single seller with no close substitutes, and holding a patent on the technology which blocks entry of competitors into the market, (McConnell, Brue, Flynn, 2009), long-standing economic concepts for monopolies were applied.
It was assumed that the company has a great potential to be profitable due to the unique product that Mr. Bury has developed. However, lacking a strong business plan could prove detrimental. It’s clear Mr. Bury has the technological skills that will be needed to move his product into the future, but not a strong business sense. By securing the business resources needed to move his company forward, he could be highly successful. Conclusion Mr. Bury has a unique and potentially profitable product which could transform how the public reads or hears literature.
Recommendations to improve his business through increasing revenue, achieving ideal production levels, adjusting fixed and variable costs to maximize profit, and methods to reduce cost have been discussed. Should Mr. Bury choose to subscribe to these recommendations, his company, and the corresponding profits, should grow. References Business Owner’s Toolkit. (2010). Fixed and variable costs. Retrieved from http://www. toolkit. com/small_business_guide/sbg. aspx? nid=P06_7510 Henderson, D. R. (2010).
Opportunity cost: The concise encyclopedia of economics. Library of Economics and Liberty. Retrieved from http://www. econlib. org/library/Enc/OpportunityCost. html McConnell, C. R. , Brue, S. L. , & Flynn, S. M. (2009). Economics: principles, problems, and policies. Retrieved from https://ecampus. phoenix. edu/content/eBookLibrary2/content/eReader. aspx. University of Phoenix. (2002). Will Bury Scenario. Retrieved from University of Phoenix, ECO561 website. Wikipedia. (2010). Inflation. Retrieved from http://en. wikipedia. org/wiki/Inflation