Existing Good or Service Business Proposal
Select an existing good or service from the Will Bury’s Price Elasticity, Incremental Costs, or Thomas Money Service Inc. scenarios, or select an existing business with which you are familiar.
Write a business proposal to improve an existing good or service for your chosen company. Include assumptions about the elasticity of demand and the market structure for the company’s good or service. Analyze data to determine fixed and variable costs.
Include rationale for the following questions:
• How will you increase revenue?
University of Phoenix Material
Will Bury’s Price Elasticity Scenario
Will Bury, an enterprising inventor, is convinced that soon everyone will be reading or listening to everything digitally, including books that have been mostly available in hard copy. He knows that there are books on CD, but these are relatively expensive and have been recorded using human readers. He also knows that there is technology that can transform the printed word into audio, but the sound is somewhat inhuman. Will plans on speeding up the transformation with a proprietary technology he has developed and patented. This technology takes the printed word for text materials and creates a file with the option of reading it digitally or listening to it with a realistic synthetic voice. Will knows that he has free access to books no longer under copyright protection, and he figures he can pay a royalty fee of $5 per title for copyrighted books that will greatly expand his catalog. So far, he has limited himself to English-language books but is working on a language translation option as well.
To date, Will’s technical skills outpace his business acumen. He is struggling with some basic decisions. He has been working on his invention as a garage operation for the last few years and has missed many of his daughter’s soccer games while working at High Tech Digital Industries to keep his family comfortable on his $200,000 annual salary and benefits package. Will may eventually have to decide whether to devote most of his time to his invention. Moreover, he is not sure how to determine all the applications for his technology, who would want it, how it would be delivered to customers, how many books would be bought at what price, and so forth. Even after he has secured the rights to copyrighted material, he needs some help acquiring the books he wants to digitally transform and scanning them into his digitizer. It is not difficult to train others to do this, but the process takes about an hour per 500 pages to complete. To make sure the process works well, Will has been doing this himself, but he realizes this is neither a good use of his time nor will it get many books digitized. Fortunately, the digitizer Will uses is inexpensive to reproduce for others to use, and Will is certain that the security he has encoded into it will prevent others from unauthorized replication of the device. Where are the people Will can hire to do the work, and how much should he pay them? If it is easy to train workers in the United States to do this, could Will pay $10 an hour for someone with the skills of a high school graduate? If this is the skill level, could he pay a worker overseas $2 an hour for the same service?
To address some of these issues, Will has been doing some research. First, he checked online to discover that a 500-page book on CD costs approximately $20. This is a good substitute for his audio files, and further research suggests that he could apply his digitizing process to more recent copyright-protected books for a royalty fee of $5 per book. He would still incur the labor charge of scanning the book. Will continues to wonder whether people want to read digitally or listen to audio books, or whether they still prefer a physical book to read. Will found an article from a reputable source that suggests customers of digital and audio books are relatively affluent, their household incomes are above average, and acceptance of digital reading for pleasure is lagging behind acceptance of digital reading for business. The article found that digital listening is attracting the same audience who download music to digital devices.
Further research has suggested that price is an important feature driving the appeal of digital book files. Will is trying to apply some earlier experiences in movie distribution to his digital book project. When movies were first released for general consumer distribution as videotapes, they were expensive—about $80 per title. When the price was lowered to $20 per title, evidence suggests that volume sales typically went up 600%. Of course, not everything stayed the same. In recent years, movie titles have been released more quickly following their showing in theaters, there have been more extra features on the DVDs because of greater storage capacity, and the format changed from videotape to disk. Some have hinted that although there are fewer blockbuster hits now, there are more titles appealing to a broader audience. Will is trying to find more evidence of the effect of price on volume demand, but this is all he has discovered so far.
Nevertheless, Will must determine a launch price for when he first introduces his digital titles to the market. He set up a website offering his small catalog of books. He set the price at $10 for a title on which copyright has lapsed and $15 for a title that includes a royalty fee. He is a little disappointed in his sales in the first 6 months of operation, having sold only 1,000 of the older books with a lapsed copyright and 2,000 of the newer books. Moreover, he is confused as to why he sold twice as many of the more expensive books. He wonders whether he should lower or raise prices to increase his revenues. What might he expect to happen to his volume sales if he does change prices? If he decides to increase or decrease prices, is it better to make a small change and observe the effects on quantity, or will customers more likely react to a change in price of at least $1 per title? If he changes his prices, will this have any effect on the prices charged by big-volume sellers for conventional hard-copy books?
While Will is pondering his pricing strategy, he visits a friend, Elsa Budley, who has had experience selling online. Elsa started an online business selling her artwork. Although her initial sales were a bit disappointing, she offered some shocking advice. She discovered that she sold more artwork when she raised her prices at the same time that she expanded her online advertising budget. Elsa thinks Will’s key to success is to raise prices and sell more books!
Will senses that he is on the brink of great success with a proprietary technology that transforms the way people access books and other materials currently offered only in print. He is also on the verge of making some fundamental business mistakes, however, that could rob him of his success. He may be more successful if he observes some basic concepts included in the early part of this course.
University of Phoenix Material
Thomas Money Service Inc. Scenario
Thomas Money Service Inc. has been in business since 1940. It started out as a consumer finance company granting small loans for household needs. Over the following 5 years, the company expanded its services by issuing business loans, business acquisition financing, and commercial real estate loans.
In 1946, the decision was made to branch out into equipment financing. A subsidiary named Future Growth Inc. (FGI) was established. This decision turned out to be very lucrative. Because of the end of World War II, society had a huge demand for construction and forestry equipment. Because of increasing demand for this type of equipment, FGI decided to make a very daring move in 1951 and purchased an equipment manufacturing company. Now they could build, sell, and finance their own brand of building and forestry equipment. FGI discontinued financing other brands of equipment.
For 67 years, FGI had been able to truthfully state that they have continuously increased profits year after year, even during economic downturns, and have never laid off workers. This track record has allowed their stock to grow from $5.00 to $85.60 with six stock splits from 1975 to 1998. FGI has never issued bonds, and the present stock value is $35
The current global downturn has caused the American economy to suffer. Oregon, Washington, and several other forestry states have encountered flooding, massive fires, and protest from animal activists. For the first time in FGI history, profits declined—down 30% from last year—and they had to lay off one-third of their workforce.
The falling economy has also caused a drop in new-home sales: sales dropped 30% from the prior year and additional declines are expected. This has caused a domino effect throughout the entire construction industry. Not all sectors, however, are being hit equally by the economy. Hospitals and nursing homes still have a demand for new buildings.
• There are currently many domestic and international companies manufacturing construction and forestry equipment. Each company’s equipment offers slightly different features and functions, which allows the market to supply many substitutes.
• FGI has repossessed over 500 pieces of equipment during the past year. They have bundled the pieces together and determined an average price for each piece. The present selling price is $1,732. Below are the demand figures for each price.
Demand data in millions in the past years
• In recent years, FGI had decreased its advertisement revenue, selecting to have a commercial during the Super Bowl and a few other sporting events.
FGI has cut down on manufacturing because of lack of demand. Below is the combined production cost for construction and forestry equipment. What level of demand generates the greatest net income?
OUTPUT PRICE MARGINAL REVENUE TOTAL REVENUE TOTAL COST FIXED COST VARIABLE COST MARGINAL COST AVERAGE
FIXED COST AVERAGE
VARIABLE COST AVERAGE
1 $2,600.0 $2,600.0 $2,600.0 $1,050.0 $990.0 $60.0 $60.0 $990.0 $60.0 $1,050.0
2 $2,500.0 $2,400.0 $5,000.0 $1,100.0 $990.0 $110.0 $50.0 $495.0 $55.0 $550.0
3 $2,400.0 $2,200.0 $7,200.0 $1,145.0 $990.0 $155.0 $45.0 $330.0 $51.7 $381.7
4 $2,300.0 $2,000.0 $9,200.0 $1,200.0 $990.0 $210.0 $55.0 $247.5 $52.5 $300.0
5 $2,200.0 $1,800.0 $11,000.0 $1,262.0 $990.0 $272.0 $62.0 $198.0 $54.4 $252.4
6 $2,100.0 $1,600.0 $12,600.0 $1,335.0 $990.0 $345.0 $73.0 $165.0 $57.5 $222.5
7 $2,000.0 $1,400.0 $14,000.0 $1,423.0 $990.0 $433.0 $88.0 $141.4 $61.9 $203.3
8 $1,900.0 $1,200.0 $15,200.0 $1,517.0 $990.0 $527.0 $94.0 $123.8 $65.9 $189.6
9 $1,800.0 $1,000.0 $16,200.0 $1,637.0 $990.0 $647.0 $120.0 $110.0 $71.9 $181.9
10 $1,700.0 $800.0 $17,000.0 $1,772.0 $990.0 $782.0 $135.0 $99.0 $78.2 $177.2
11 $1,600.0 $600.0 $17,600.0 $1,917.0 $990.0 $927.0 $145.0 $90.0 $84.3 $174.3
12 $1,500.0 $400.0 $18,000.0 $2,091.0 $990.0 $1,101.0 $174.0 $82.5 $91.8 $174.3