East-West Transportation, Inc. primarily operates in the eastern regions of the United States. The four core divisions of East-West Transportation are Consumer Goods Division, Coal Division, Chemicals Division, and the Forest Products Division. With the help of the consulting firm of Brighton, Young and Roy, Inc. (BYR) and Peter Schultz, Senior Vice President, Strategic Planning, of East West Transportation the various divisions and market situations will undergo review enabling the formation of future business strategies (University of Phoenix, 2003).
The Consumer Goods Division of East-West Transportation operates in a perfectly competitive market. “Perfect competition is characterized by many buyers and sellers, many products that are similar in nature and, as a result, many substitutes” (Investopedia, 2007). The dilemma facing the Consumer Goods Division is the increasing and continuing losses for this division. The decision under consideration for this division is whether to shut down or allow continuance by reducing or minimizing losses.
In a perfectly competitive market, businesses freely enter and exit the industry with no restrictions or government regulations. As the number of sellers and buyers are large, none can individually effect or set the market price. The demand curve for a perfectly competitive enterprise is horizontal or a perfectly elastic demand curve. The price is unrelated to the quantity of output produced or the quantity sold resulting in the price being equal to the marginal cost and marginal revenue (AmosWeb Encyclonomic, 2007). In order to maximize profit an entity produces the quantity of output that generates marginal costs being equal to marginal revenue. When marginal revenue is greater than marginal costs a company can increase profit by increasing output; when marginal revenue is less than marginal costs a company should decrease the output (Colander, 2004, 248).
The Consumer Goods... [continues]
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