The business proposal focuses on the strategy Everest Technology Computer will employ to increase revenue and maximize profits in a competitive business environment. The company will create a barrier to entry through low cost competencies, cost leadership and differentiation. Using these strategies, Everest Technology will be able to achieve a leadership position in the industry.
Business Proposal
Company Overview
Everest Technology Computer is a new company that intends to manufacture computer and its accessories. Since the company will operate in competitive market environment, Everest Technology needs to understand the costs structure to increase revenue and maximize profits.
The objective of this paper is to provide a business plan that will assist the Everest Technology to increase revenue and maximize profits. The next section discusses the strategy that Everest Technology will employ to increase revenue.
Strategies to Increase Revenue
Everest Technology will use several techniques to increase revenue: The strategies are as follows:
Cost cutting measure
Increase the unit price
Increase in sales
One of the best strategies that Everest Technology could employ to increase revenue is to decline costs since cost reduction is easier to implement than price rise. The equation below reveals the four factors that affect profitability:
Equation Profit = "Revenue - (Variable costs + Fixed (capacity) costs)."
Typically, costs predictable are easier to control. Thus, an appropriate method to increase revenue is to implement the cost cutting measure, which will assist the company to increase profits. .Thus, the company could reduce costs in the areas such as selling and distribution, purchasing, administration, production, research and development. Cost reduction in these areas will produce a corresponding increase in revenue.
Moreover, the company could save the fixed costs by cutting the costs of anything that does not generate revenue. For example, the company could reduce the costs on rent, travel, interests on payable and communication. Using cost reduction analysis, the company will generate 5% increase in profit margin because 5% reduction in the fixed costs will lead to the 5% increase in profit margin everything else being equal. This is revealed in Table 1.
Table 1: Increase in Revenue through Fixed Cost Reduction
Initial
Option 1
Sales
Cost
70
65
Fixed
30
25
Unit Variable Cost
0.4
0.4
Variable
40
40
Taxes and Insurance
10
10
Profits
20
25
Profit Margin
20%
25%
Another method the company could employ to increase revenue is by reducing the variable costs unit through outsourcing, cheaper outsourcing, and off shoring and improve efficiency. Typically, 5% decline in variable costs would lead to 2% increased in the profit margin everything else being equal. This is revealed in Table 2.
Table 2: Increase in Revenue through Variable Cost Reduction
Initial
Option 2
Sales
Cost
70
68
Fixed
30
30
Unit Variable Cost
0.4
0.38
Variable
40
38
Taxes and Insurance
10
10
Profits
20
22
Profit Margin
20%
22%
Another strategy to increase revenue is to increase the unit price while maintaining the volume of production. With this strategy, 5% increase in sales will lead to the 3% increase in the profit margin as being revealed in Table 3. However, this strategy is not advisable because customers might switch to competitors with the increase in price.( Landsburg, 2002).
Table 3: Increase Revenue by increasing Price Strategy
Initial
Option 3
Sales
Quantity
10
10
Price
10
10.5
Cost
70
68
Fixed
30
30
Unit Variable Cost
0.4
0.4
Variable
40
40
Taxes and Insurance
10
10.5
Profits
20
24.5
Profit Margin
20%
23%
Alternatively, the company could increase revenue by increasing the sales while the fixed costs remain constant as being revealed in Table 4. The company will realize 1% increase in profit margin by increasing sales.
Table 4: Increase Revenue By increasing Sales
Initial
Option 4
Sales
Quantity
10
10.5
Price
10
10
Cost
70
72
Fixed
30
30
Unit Variable Cost
0.4
0.4
Variable
40
42
Taxes and Insurance
10
10.5
Profits
20
22.5
Profit Margin
20%
21%
1.2: Determination of Profit-maximizing Quantity
The basic assumption of a firm is to maximize profits. Thus, Everest Technology will realize profit when revenue is greater than costs as being revealed below:
Profit = Revenue -- Cost
Alternatively, the company will maximize profits when marginal revenue is equal to marginal costs. As being revealed in fig 1, the profit maximizing quantity (Q) is reached when marginal costs are equal to the marginal revenue. Typically, marginal profit is realized when marginal revenue is greater than the marginal cost. If the marginal revenue is greater than the marginal cost the company should produce greater quantity. On the other hand, if marginal costs are greater than the marginal revenue, the company should produce lesser output. However, when marginal profit is zero, this is the point where marginal revenue is equal to the marginal cost and this is the quantity where the company will maximize its profit. As being reveled in the Fig 1, the company maximizes its profit at the point (Q) quantity.
Fig 1: Profit Maximizing Quantity
1.3: Maximizing Profit Using the Concept of Marginal revenue and Marginal Cost
Marginal revenue and marginal cost concepts are very important to determine the maximize profit point of the company. The company will maximize its profits when marginal cost is equal to the marginal revenue. The information needed to determine the maximizing profit of the company is compute the Total Revenue and Total Costs of the company, and the quantity produced.
The total costs are the entire costs that the company will incur to produce goods and services. The marginal costs are the extra cost realized from the increase in the total cost. The marginal revenue is the extra increase in the total revenue. Thus, when the company produces additional output, the additional costs of producing additional quantity is the marginal costs and when the company sells additional quantity, the revenue generated from additional quantity sold is marginal revenue. Thus, when marginal revenue is equal to marginal cost, this is the point the company will maximize its profits.
When there is limited information, it is not possible to identify the optimal price and quantity combination precisely. Using the hypothetical data below, the company could use price and quantity to make decision. From table 5, it is revealed that the profit-maximizing price is between $160 and $180. Thus, the company should use pricing technique to maximize profit.
Table 5: Using Price Technique to Make Decision
Price ($)
Quantity
(kilograms)
Additional Revenue
Additional Cost
16
30
5,000
54
8,040
1,032
96
13,200
1,806
22,400
3,268
36,160
5,676
60,840
10,277
85,080
15,867
1,355
88,080
19,049
1,883
89,060
22,704
2,395
64,740
22,016
2,825
29,500
18,490
3,258
12,780
18,619
3,644
-- 11,120
16,598
4,044
-- 24,880
17,200
4,428
-- 42,480
16,512
1.4: suggested mix of Pricing and Non-pricing Strategies.
Pricing strategy is the method firms use to manipulate profits over costs, while non-pricing strategy is to do with the promotion and advertising. While pricing strategy works better for smaller company, which is able to manipulate prices to attract consumers, on the other hand, non-pricing strategy will reward companies operating in a competitive market. Thus, our company could use employ the mix of both pricing and non-pricing strategies. Our company may choose from different type of pricing strategy, which includes:
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