The price elasticity

NGM are trying to improve there profitability and there are various ways of doing this, one way would be to change more money but this would depend on the price elasticity. There is also the option to cut cost weather this means increasing demand and cutting unit costs or fixed costs. I am going to us the various appendices to back these statements with some factual evidence then make my own personnel suggestions. From looking at appendix A I would say it would of been a better sample if the market research data had been collected in the same way for all the 3 products as this would have been a more accurate method.

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The data shows that Nasties are the most used product and the biggest selling which would be a possible area to aim the new profit making ideas at. The goblins seem to be used mainly form time to time with only 20% of people using them on a regular basis. Nerds are the lowest selling product with 11 thousand units being sold annually. Appendix B shows the elasticity of demand that will show how a change in price will effect the demand for a product.

The lowest selling product Nerds is price inelastic which means that a price increase will not effect demand as much as the price increase so if the price rose by 10% the sales would only fall by 3% so this would possibly be a good opportunity to increase profit as the unit cost may not increase so having a higher profit. Goblins are price elastic at 1 so this means an increase in price is directly proportional to sales so not having a positive effect because if the unit production decreases the unit cost may rise so causing profit to fall.

Nasties are very price elastic at 2 this means that a 10% rise in price will cause demand to fall by 20% so rising the price of Nasties would not cause profits to increase. Especially as the unit cost is likely to be lower as they produce 28000 annually. So a good profitability option for NHN Ltd would be to increase the price of Nerds, as the demand will not fall as greatly as it would for the other products. Appendix C shows the factory production for the three factories production levels. Nerds are not using the recommended amount of capacity for the factories, as they are not selling as well as the Goblins and Nasties.

The production of goblins and Nasties is using very high capacity with Leeds working at 100% on both of them. Walsall and slough are also working at full or very close to full capacity for these two highest selling products. The Walsall factory is working well under the recommended capacity level of 90% so it is being very unproductive. There is a option to close this factory down as this would save a lot of money in the long run but there would be a large initial cost in the short term and this may not be idea for Nigel Northerly who is thinking about retirement.

There is the option of sale and lease back but this does not seem very appropriate as they do not seem to have a cash flow problem. Appendix D shows the budget allocation for the factories. The main figure that stands out is that there is a positive variance of 35000 that could be redistributed, as the factories have not needed it. The money could be using in marketing to try and boost sales that would cause a rise in profit and use up some of the wasted capacity in the Walsall factory. This would be a way of increasing productivity and profitability. Appendix E shows the stock control levels for the different products.

Nerds have got an increasing level of stock which means they are being produced quicker then they are being sold so there is room for cost to be cut in this area as there is no need to have large stocks as it cost money in warehouse expenses and it is also hard to sell stocks or partially finish goods if there is no demand. So if costs were cut there it would mean that a greater profit would be made. Goblins stock control is very systematic so when the stock levels reach a certain level they order in more stock so to cut down on warehouse usage space and to regulate the sales in comparison to demand.

To conclude I would say they need to increase there prices on the goblins to make them more profitable and also cut down on the production of Nerds so not to build a huge stock pile of goods which is not generating profit but costing the NGN Ltd lost of money. They may also want to look at leasing part of the Walsall factory to another company so not to shut the factory down but not to loose the potential profit locked up in the spare capacity.