Revenue_Cost_Structure_Proposal

Revenue, Cost Concepts, and Market Structure Proposal Cover Letter Thomas Money Services, Inc. A Consumer Finance Company Subsidiary: Future Growth, Inc. Equipment Financing Xxxx Street Washington State, 99999 555-234-4567 Phone 555-234-3344 Fax Xxxx Avenue Oregon State, 55555 333-232-3333 Phone 333-443-2234 Fax Confidential Business Proposal Thomas Money Service, Inc. (TMS) has increased its revenues in the past by growing its business and expanding its services. The expansion of services includes issuing business loans, offering business acquisition financing, and commercial real estate loans. Thomas Money Service grew the company by establishing a subsidiary company called Future Growth, Inc. (FGI), which offers loans to finance equipment. The businesses flourished because of the large demand for these types of loans. The current economic downturn has caused a significant decrease in the demand for these types of commercial construction loans. In the United States the construction industry has suffered substantial losses in the market causing a domino effect. However, research and data show that not every market in the construction industry suffered the same losses as did the housing industry where previously both companies had focused the majority of loans. The following proposal will focus on offering the company recommendations to the companies to increase revenues, achieve ideal production levels, determine how both fixed and variable costs should be adjusted to maximize profit, and identify methods to reduce costs (McConnell, Brue, & Flynn, 2009). Increasing Revenues Because research showed not all construction markets are suffering equally in this downturned economy, the proposed plan would shift focus of construction loans from housing markets to commercial markets that include hospitals and nursing homes where growth and demands for new building loans exist. The company must focus in areas of growth to remain in business; seeking to partner with general contractors, sub-contractors, custom builders, and vendors. The subsidiary FGI focused its loans on equipment. This year the company repossessed 500 pieces of equipment. The demand for these types of loans is highly competitive (substitutable), the demand is quite elastic. When demand is elastic an increase in cost will cause a sharp decline in demand of product as well as the labor to produce the product. The market structure is oligopoly, allowing the market to offer many substitutes in the form of competitors. The company must reduce the supply of repossessed pieces of equipment because changes in product demand, ceteris paribus, will cause a change in demand for resource. An increase or decrease in demand will also cause an increase or decrease in price. By decreasing its price the company should be able to increase demand for labor required to produce the product potentially bringing back to work some employees recently laid-off because of cutbacks. This results in a recalculation of the resource demand schedule. The decline in demand (and price) will cause a shift in the resource demand curve to the left. The proposed plan for FGI is to bundle these pieces of equipment and set selling prices accordingly. The present selling price is $1732 per piece, and at that selling price the demand (in millions) is at 182 pieces. This does little in reducing inventory quickly and for potential profit, even in the short term. However, when reducing the price from $1732 to 1634.30 the demand increases to 350 subsequently reducing the inventory and quickly reducing supply. This would increase revenue from $315,224 at 182 pieces to $572,005 at 350 pieces, increasing revenue by $256,781. When consumer demand and price declines from D1 to D3 (see demand curve below) some competitive owners will decide to seek normal profits elsewhere rather than accept the below-normal profits or losses presently confronting them. Losses will continue and more firms will leave the industry until the supply curve shifts from S1 to S3, again increasing prices to normal and causing restoration of the long-run equilibrium. D1 D2 S1 S2Supp Supply and Demand Curve Supply/S Demand/D Proposal to Increase Profits and Achieve Production Levels (Employing Advertising and Product Development) Firms often do not want to compete on basis of price oftentimes prefer to use product development. The proposed suggestion is to compete both on price (short run) as well as product development and advertising (long run). The competition will easily and quickly match prices and when this happens it will cancel the potential for future gains. The utilization of product improvement by focusing (to commercial construction loans) and a successful advertising campaign can produce more permanent gains in the market. Oligopolistic firms usually have sufficient financial resources to engage in product development and advertising. Profits earned in the past can help finance both. The company has already budgeted for a Super Bowl advertising campaign one of the highest viewed programs in advertising as well as other local sporting event advertisements. In this instance providing useful information to consumers and lowering their search costs will result in greater economic efficiency. Cost Adjustments to Maximize Profits The optimal combination of resources will minimize costs at specific levels of output. The profit maximizing rule occurs when marginal revenue (MR) = marginal costs (MC) or MRP=MRC. Short-run profit maximization for a purely competitive firm will help to minimize losses. Reducing inventory and accepting lower per unit profits for additional units of output will add to their total profit. Limited income in America has forced most consumers to choose what to buy and what to forego to fulfill wants. Most households in the United States have suffered decreased income changes, which forces them to buy fewer goods and services. By implementing the right mix of product improvement and advertising and focusing cost adjustments accordingly, TMS should experience profit increases. Adjustments to costs other than those mentioned come from costs of production. Based on data supplied we know that production or output of zero has a fixed cost of $990, the fixed cost does not change regardless of output and cannot be adjusted as they are associated with the firms very existence. The variable costs can be adjusted and change directly with the output. For a time variable costs will increase with output, but at a decreasing amount. Over time the variable cost increase decreases in small amounts. The data shows that at the cost suggested for FGI of $1634 the output is about 11, the variable cost is $927 and the average total cost is $174.30 and total revenue is $17,600. At the current price of $1732 the output is about 10, the variable cost is $782, and total revenue of $17,000. Because variable costs are associated with the production, they too are hard to adjust or change. An increase in demand is conducive to the kind of innovation that reduces variable costs as well as the aforementioned recommendation in response to cost of production to increase profits. Methods to reduce costs The proposal has offered several suggested methods to reduce costs and maximize profits. Reducing inventory will reduce costs and increase profits. Reducing price will in the short-term increase profits and increase demand. Reducing production costs are not suggested, but necessary during economic downturn. Product improvement and carefully selected advertising campaigns can reduce costs and will increase demand and increase profit. References Ball, L. (2009). Money, banking and financial markets. Retrieved from https://ecampus.phoenix.edu/classroom/ic/classroom.aspx. McConnell, C.R., Brue, S.L., & Flynn, S.M. (2009). Principles, problems, and policies. Retrieved from https://ecampus.phoenix.edu/classroom/ic/classroom.aspx. Pugel, T.A. (2009). International Economics. Retrieved from https://ecampus.phoenix.edu/classroom/ic/classroom.aspx.