What level of demand generates the greatest net income?

Description of your original product or service
March 27, 2020
Which type of operation has a more difficult time managing capacities: an environment supporting standardized products or one supporting customized products? Why?
March 27, 2020

What level of demand generates the greatest net income?

production cost

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.

Data

• 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

Price Demand

1,990.1 123 1,732.0 182 1,634.3 350 1,252.0 380 732.1 400 622.3 456

• 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 TOTAL COST 0 $990.0 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

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