The current financial status of Thomas Money Service Inc. needs attention to help improve its existing goods and services to overcome the challenges faced by the economy downturn. This proposal will address those issues effecting the profitability of Thomas Money Service Inc. and strategize affective ways to overcome those obstacles to return to profitability. “Thomas Money Service Inc. (TMS) has been in business since 1940” (University of Phoenix, 2012). The company started out granting small loans for consumer needs and evolved into offering business loans, business acquisition financing, and commercial real estate loans, (University of Phoenix, 2012). TMS expanded into equipment financing in 1946 under the subsidiary of Future Growth Inc. (FGI), (University of Phoenix, 2012). The venture in turn became very lucrative for TMS because of a huge demand in construction and forestry equipment after World War II (University of Phoenix, 2012). In 1951, FGI purchased an equipment manufacturing company building, selling, and financing their own building and forestry equipment and discontinued financing other equipment (University of Phoenix, 2012).
For over 67 years it has been profitable and has stated in previous economic downturns that the company never had to lay off any of its workers, (University of Phoenix, 2012). However, in the current recession and after several natural disasters affecting forestry states, FGI profits declined last year by 30%. Home sales also declined, constructions slowed and caused FGI to repossess equipment and sell it at a discounted price. With the changing economic environment and profit loss Thomas Money Services Inc. has requested recommendations to help increase its revenue, determine its profit maximizing quantity, increase product differentiation, increase barriers to entry, and minimize cost of production. Market Structure and Elasticity of Demand
Thomas Money Services Inc. operates in a monopolistic competition by offering products and services that can be differentiated and is very competitive with other sellers offering similar products for consumption. By creating an environment in which consumers looking to purchase equipment could receive financing and goods in a one stop shop has positioned TMS as leader in the market share in the construction industry prior to the recession. Because there are similar products available for consumers to obtain instead of FGI’s equipment, it has to differentiate its product and services as the best to have by nonpricing competition.
The price elasticity of demand for Thomas Money Services Inc. from its original price of $1990.1 to its new price of $1732.0 shows the responsiveness of consumer to the quantity demanded of goods and services at its new demand of 182 million units from it its original demand of 123 million units shows that the PEoD is 3.70 resulting in TMS being very elastic. Although Thomas Money Services Inc. has not been a price taker but a price maker distinguishing it has a one stop shop for consumer’s construction equipment. The market has changed resulting in consumer finding alternatives to TMS goods and services decreasing revenue over the last year. “There are many domestic and international companies manufacturing construction and forestry equipment” (University of Phoenix, 2012). Because TMS offers elastic goods and services it has to continue to monitor the market to understand the demand. Recommendation
Increasing revenue is the objective for Thomas Money Services Inc. regardless of how the economy is doing. Because the market has declined in home sales, individual construction, and forestry equipment TMS should focus its marketing on hospital and nursing homes. According to University of Phoenix, not all sectors have been affected by the economic downturn hospital and nursing homes still have a high demand for new building (2012). These sectors are potential areas to increase revenue for TMS. Another area is in the price of equipment. To continue success in the marketplace the elasticity of demand plays a vital role. Currently, FGI has repossessed equipment and selling each unit at $1,732. From the demand chart below it will acquire revenue in the amount of $315,224 for the sale of 182 units. If FGI were to decrease the price to $1,634.3 per unit from the demand chart below the demand will increase to 350 units sold, resulting in $572,005 in revenue. This will increase revenue by $256,781 resulting in more profit to invest back into the company. Over the past years the data for demand is in millions.
The monopolistic competitor maximizes profit by producing the output at which marginal revenue equals marginal cost (McConnell, Brue, & Flynn, 2009). Marginal cost is the additional cost it would take to produce another unit of good or service. Marginal revenue is the additional revenue acquired from selling the additional unit. To reach profit-maximizing quantity Thomas Money Services will need to continue to increase output until its marginal revenue equals its marginal cost. Because TMS has been in business for more than 60 plus years it is currently operating in a long run curve where it earns a normal profit. Barriers to Entry
Unfortunately, because Thomas Money Service Inc. operates in monopolistic competition there is relatively easy entry and exit into the market. When demand is high for construction and forestry equipment there will be surge of newer firms to enter the market because capital requirements are low. However, during this economic downturn many newer firms will exit because they will be unable to differentiate themselves from the longstanding branding and reputation that Thomas Money Services Inc. has had in the market. By making it more difficult to imitate TMS goods and service will result in an increase barrier to entry for newer competitors. Product Differentiation
In recent years, Thomas Money Service Inc. has decreased it advertisement revenue to having a commercial in the Super Bowl and a few other sporting events (University of Phoenix, 2012). In order to increase its product differentiation it will need to increase advertisement revenue to inform consumers of product differences, thus increase product branding and consumer loyalty. Since TMS operates in a monopolistic competition it has to advertise heavily to inform consumers of the benefits of its goods and services, especially in nursing home and construction magazines. When consumers prefer a specific product then within limits they will pay more to satisfy their preferences, thus making the product more inelastic to changes in the price in the long run (McConnell et al., 2009). Minimize Cost of Production
While fixed costs have stay constant for various outputs of production for Thomas Money Services Inc. there are still ways to minimize cost. Installing proper equipment for processing and manufacturing the equipment and staying aware of the latest technology will help in cutting cost. By TMS shopping around for the best bargain in raw material and continually monitor variable cost to not exceed output of production. Combine project to offset prices for material for future projects Conclusion
In conclusion, Thomas Money Service Inc. is a sound company that needs to adjust its strategy during this global recession to improve profits. This business proposal has addressed some of those issues to help increase its revenue, maximize profits, minimize cost, and differentiate it from its competitors. These recommendations are only few ways to overcome the challenges faced by TMS. Thomas Money Services Inc. will need to continue to monitor the market and their effectiveness to adjust to the ever changing-market.
McConnell, C. R., Brue, S. L., & Flynn, S. M. (2009). Economics: Principles, problems, and policies (18th ed.). Boston, MA: McGraw-Hill Irwin.
University of Phoenix. (2012). Thomas Money Service Inc. Scenario [Multimedia]. Retrieved from University of Phoenix, ECO/561 website.