Ecn 561 Wk 4 Fgi Business Proposal

1467 words - 6 pages

FGI Business Proposal
Economics 561
March 18, 2013
Instructor Mostafa Baladi, PhD

FGI Business Proposal
Thomas Money Service Incorporated is manufacturers and finance building and forestry equipment under a subsidiary Future Growth Incorporated (FGI). After over 60 years of consistent increases in profits, recent fluctuations the economy as well as flooding, massive fires and protests from animal activists attributed to a decline in last year’s profits of 30%. The organization is seeking ideas and suggestions to change their business ...view middle of the document...

According to the output quantities, listed in Appendix A, marginal revenues at the 12th unit is $400 whereas the marginal costs are $174 or MR>MC. If the assumption is marginal revenues and marginal costs from unit 12 to 13 are equal to the same as from unit 11 to unit 12, marginal revenue would decrease by $200 and marginal costs by $29. Output of unit 13 marginal revenue ($200) is less than marginal costs ($203). Therefore, optimal level of output in which FGI can maximize profits is 12 units.
Because of the type of market, competitors enter and leave the market depending on the profitability and demand of the market. In long run equilibrium, FGI can expect to earn normal or break-even profits. When demand is high, FGI and competitors can charge a higher price, thus increasing production to meet demand. During this time additional firm will enter the market taking market share and lowering prices. When demand declines, FGI must charge a price lower than the average total costs and minimize costs by producing fewer units. Although there are losses in short run equilibrium, there is good news. Firms will begin to exit the industry during this time and price will return equal or above average total cost and output will readjust to the level marginal revenue equals marginal cost.
The question arises, how can FGI expect only normal profits, if they previously experienced growth over 60 years? FGI’s goal is to return to profitability. The answer is product differentiation.
Product Differentiation
Organizations in a monopolistic competitive market must strive to separate their products from the others. There are several areas FGI can improve their product differentiation as well as increase revenue; these include advertising, research and development (R&D), product differentiation, and market niche.
Today, the organization’s advertising consists of one commercial during the Super Bowl and other sporting events. A 30-second advertisement during the Super Bowl averages between $3.5-$4 million dollars (Neil, 2013). If one assumes an additional $1 million dollars are currently spent on advertising at other sporting events, FGI is spending approximately $5 million dollars per year on advertising.
The organization should split the current advertising budget to R&D and advertising to target methods that appeal to builders and contractors who specialize in nursing home and hospital construction. Because hospital and nursing home development has not shown a decline during the economic downturn, there is a product differentiation opportunity for FGI to capture a niche market. Advertising should highlight several features that distinguish FGI from their competitors. Examples may include number of years in business, ability to finance equipment, availability of new and used replacement parts, and their specialization in equipment...

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