Revenue Cost Structure Proposal Essay

1283 words - 6 pages

Revenue, Cost Concepts, and Market Structure Proposal
Cover Letter
Thomas Money Services, Inc.
A Consumer Finance Company

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 ...view middle of the document...

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.

Supply and Demand Curve

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...

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