Intrepreting_Economics

Assignment 4: Interpreting Macroeconomic Conditions Your name Instructor’s name Managerial Economics and Globalization—ECO 550 Date Background motivation You are an advisor to your company’s investment management committee. Your company, XYZ Industries, Inc., manufactures automobile decorative and finishing accessories such as floor mats, seat covers, mirrors, and decorative decals. Some of your product line is high end upgrades for new cars, but most of your market is retail outlets and the ultimate customers are purchasers of used car or they are ‘home ‘mechanics. Your sales growth generally correlates with retail sales not with new auto sales. Your company is currently located in the northeast U.S. In 2008 you acquired a location in the Midwest in order to be more centrally located for distribution to major markets in the southeast and the west. Because of rising fuel cost there is strong interest in moving forward as soon as possible. However, when the recession began the company decided not to proceed with the project until growth in consumer demand was expected to again be strong. It will take one year to complete the new facility. If the project begins today, will there be enough economic growth in the economy to support the new facility one year from now. Being a producer of automobile accessories, our sales are not related with the rising sales of new cars. Instead, people who buy used cars upgrade their cars with such accessories that we produce. Our sales are mostly directly related with the sale of used cars. Currently we are present in North East and Midwest States. And the increasing sales and customer demands have made us to increase our presence in the market. Coupled with the rising costs of the fuel, having our presence further South would increase our market and sales. But the recent recession has made us to think about expanding our market. As this would require one year for the facility until the first sale could commence. We have to take all the paradigms possible to be sure that we would be able to make the business profitable with either expanding or retracting from further market presence. As our sales are directly related with sale of second hand sales of cars. We have to make sure that if we intend to increase our market presence these customers would buy old cars and in return increase the sale of our manufactured car accessories. One thing to keep in mind is that vehicles are very important mode of transportation. Each person need to travel at distant places even for reaching their work place in order to earn. So the use of cars cannot decline substantially due to recession until public transport is as good as in cities like New York. According to the Bureau of Economic Analysis real GDP grew 1.3 percent which is below the private-sector expectations of 1.8 percent growth and up from 0.4 percent growth in the first quarter (2011, Bureau of Economic Analysis). This is an indication that the recession was more severe than initially estimated. So keeping this in mind that cars can never be not in use, we have to make sure that after this recession people buy old cars and have to have money to accessorise their purchased cars. So at the time of recession people can’t stop using their cars they may sell their cars replacing cars that are more economical to their budgets rather than totally stop using them as there are currently no other travel alternatives available. People at this time would prefer buying old cars and the market for second hand used cars would increase. And as soon as the market starts to revive people would not immediately buy new cars but wait for the market to be totally stable and their incomes stagnant. Until then people would like to accessorise their existing cars. At the time when people have money to accessorise their cars we have to make sure that our products are available in the market and at competitive prices. We can do this through our existing premises but due to large distances and high fuel prices we would not be able to sell our products at prices that are comparable to out competitors. For this we need to make sure that we use the new premises and make the products available so that we are selling at prices not more than the competitors. As far as the commencement of the new premises is concerned, this will be the right time to invest in the market to increase the market presence because as soon as the market starts improving people would require accessorise to pimp up their cars. As the new premises would take about one whole year to be functional, this is the right time to invest. Firstly because the banks would be able to provide loans at cheaper interest rates and secondly, as this project is dependent on forecast, one year would be the right time to be available in the market rather than after the market has revived, because after the market is revived people would prefer buying new cars rather than pimp up their old cars. Moreover, these premises would expand the reach and at the time when fuel prices are high this would make our products cheaper than the competitors or at least comparable to their pricing. The only risk that lies is if the market takes longer than expected to recover. During this time our sale which is related with the sales of old cars and the sale of new cars both would be minimal. This may result in late sales and we may have to bear the burden of the expenses of the new premises as well as the existing premises. But one thing that safeguards us is our secondary customers which are home mechanics. During the time of recession people are tempted to go the mechanics for the care of their cars for faults. As people do not want to spend money on their old cars they tend to go to the home mechanics. Moreover, servicing their old cars in authorised workshops is first of all expenses and secondly waste of money as they may be currently using second hand cars temporarily. As people tend to go to the home mechanics they end up buying parts for their cars from them which in return increases our sales. So keeping the products available to the mechanics for them to use for their customers is huge incentive for us to be available in the market at the right time. This may not be the only reason to make initiative of the new premises but at least would help us overcome the burden of the fixed expenses which the company incurs if the recession prolongs. Reference Bureau of Economic Analysis, Economic and Statistical Administration, (2011), retrieved September 3, 2011 from http://www.esa.doc.gov/Bureaus/bureaus.