REVENUE, COST CONCEPTS, AND MARKET STRUCTURE PROPOSAL

Assignment: Revenue, Cost Concepts, and Market Structure Proposal

By Richard Christiansen

ECO 561 Hohokam Campus University of Phoenix

Facilitator: Dr. Bob Sherman

Week Three February 2, 2011

REVENUE, COST CONCEPTS, AND MARKET STRUCTURE PROPOSAL In the Will Burys Price Elasticity Scenario, Bury is an inventor and entrepreneur of a

new monopolistic company with inelastic products. Burys new technology can take printed text material and create two options of either reading the material digitally or listening to the same material with a synthetic or humanistic voice. This new proprietary technology has been developed and patented by Bury and he presently wants to start plans that will maximize his efforts as well as his companys potential (University of Phoenix, 2011). There are several important economic issues that Bury needs to address in this primary stage of business for continued success and profitability. This paper will discuss the following four issues 1. How does the company increase revenues, 2. How does the company achieve ideal production levels, 3. Determine how fixed and variable costs should be adjusted to maximize profits, and 4. Identify methods to reduce costs. Increasing Revenue Bury wants his company to increase revenues so he may be able to quit his current job and work his own company full time. The first action that needs to be taken is to raise the retail price of both products he produces and to place properly his product above the current mix of competing producers. Within monopolistic competition, firms should use their market power to generate profit. Burys company is comparatively new to the CD book market and has a product differentiated from others. Burys company will be able to maximize their profits while producing a quantity where their marginal revenue (MR) will be equal to their marginal cost (MC).

REVENUE, COST CONCEPTS, AND MARKET STRUCTURE PROPOSAL At the same time they are raising retail prices, Bury should also increase his marketing

efforts and increase the amount of selections they have to offer in the catalog. Within the last six months, Bury was surprised that he sold twice as many of the newer books than those of a lapsed copyright. Consumers have shown that the newer the title, the more interest they have in purchasing. The website needs to be updated, expanded, and positioned so consumers have the opportunity to know that this company exists and provides a differentiated option concerning CD books. Promotions should also be included in the website to promote multiple purchases, referrals, and a suggestion box for future catalog selections. In Burys earlier research, he learned that 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. Bury should include more selections of the more successful business, sales, and marketing titles currently available. Another potential route to increase revenue is to market this new technology to book publishers to outsource their own audio selection to be produced by Burys company. According to the 2010 Audio Publisher Association (APA) Consumer Survey (released in October 2010), showed that more than one-third of all adults have listened to an audio book, and 20 percent have listened in the past year (Benson, 2011, para. 2). This could eventually lead to Bury selling his invention to another company that has the resources and volume to make it much more profitable for the larger company. Achieve Ideal Production Levels Although Burys company is fairly new to the wide and vast market of CD books, his product is differentiated enough to have sales increase through the reasons explained above to increase revenues. Bury has found that the newer titles are more popular than the others and that through his proprietary technology he can duplicate his product for less costs each time. A one-

REVENUE, COST CONCEPTS, AND MARKET STRUCTURE PROPOSAL time set up fee of approximately $10 to transform the data through his digitizer will create a finished digital and audio product. Bury should increase levels of production of the newer titles including a wider range of business titles. If Bury was to have multiple digitizer units, he could then hire other individuals to increase production and Bury could supervise the operation. This

company will see increased growth in sales and over time will be able to control production costs through inventory controls on what titles are selling and what titles are not.

Fixed and Variable Costs Fixed costs are costs that are associated with the business that do not vary when there are changes in output. Variable costs are those that do vary according to changes in output. It is also important that we distinguish between the definition of profit from the point of view of an accountant and an economist. An accountant would characterize profit as revenue minus explicit costs. An economist would take total revenue minus all explicit and implicit costs. Implicit costs would also include money for the entrepreneur (McConnell, 2009). In the Bury scenario, accurate accounting information is limited, but there are certain costs that we can determine. Bury is using his garage of his personal home as well as electricity, water, gas, Internet, and phone access. Bury should receive compensation for the use of these items and these costs also can be used for income tax purposes for both his personal and business returns. Along with any personal compensation to Bury, these costs would be considered fixed costs. The variable costs associated with this business would include manual set-up costs for digitizing one title, material costs, shipping, and handling costs. In this scenario, Bury will see these variable costs go down as they build up their library with digitized titles. This variable labor cost will be consistent with actual costs, but as sales volume increases per title, this variable labor cost could be spread over the volume of sales.

REVENUE, COST CONCEPTS, AND MARKET STRUCTURE PROPOSAL Reducing Costs In the short run of increasing the library of titles available, variable labor costs would increase. In the long run of producing tiles that have a greater opportunity in selling, these same variable costs can be spread out among the increased amount of units. This will have an effect of lowering labor costs to the increased amount of sales on the most popular titles. Another

strategy to reduce costs is to negotiate to have the royalty fees lowered. The royalty fee is a large fee when associated with the other costs involved in the production, and if lowered could substantially increase profit potential. The labor costs could also be looked at when strategizing over how to reduce costs. The scenario states that Bury would pay $10 per hour to a high school student, and may pay for a worker overseas $2 per hour for the same service (University of Phoenix, 2011). Bury would need to see what set up costs would be associated in an overseas worker performing the task. Investigating other costs such as time allocations for receiving finished goods would need to be considered. Minimum wage now is close to $7-8 per hour. Depending upon the framework of the company and how Bury would pay this type of workers, there would be other costs involved in having employees? These are definitely some major questions and options that would need to be discussed and realized if the company is to increase sales volume and titles available. Conclusion It is my belief this company can have a greater share of the market by properly pricing their product, advertising the differentiating qualities and features increase newer and business associated titles, and by keeping the variable costs down. The major assumption made is that people will continue to want this type of product and that Bury will continue to grow his company. We also assume that Burys ethical values are solid and founded upon regulated

REVENUE, COST CONCEPTS, AND MARKET STRUCTURE PROPOSAL accounting rules and regulations. It is also my belief that if Bury were to follow the proposals set in this paper, Bury would achieve increased sales volume and profitability.

REVENUE, COST CONCEPTS, AND MARKET STRUCTURE PROPOSAL References Benson, J. (2011). The Price of E-Popularity. Book Business Magazine, February 2011, Retrieved from http://www.bookbusinessmag.com McConnell, C.R., Brue, S.L., & Flynn, S. (2009). Economic: Principles, problems, and policies (18th ed.). New York, NY: McGraw Hill/Irwin. University of Phoenix. (2011). Will Burys Price Elasticity Scenario. University of Phoenix, Supplement, ECO561 Economics website.