Revenue, Cost Concepts, and Market Structure

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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.

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, generating 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...
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