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Category: Business

Autor: anton 07 March 2011

Words: 2570 | Pages: 11

Economic Analysis

History of Timberland

The birth of “Timberland” begins with Nathan Swartz, a young boot making apprentice ‘stitcher’ in 1918. At ten years of age the owner of the Abington Shoe Company took a chance and hired a much-needed young helper to learn the craft of boot making. Nathan’s job responsibilities included stitching seams, cutting leather, attaching soles and perfecting the art of boot making. Thrity-four years later, Nathan furthered his interest in boot making by purchasing half of the Abington Shoe Company. In 1955 he purchased the remaining 50% of the company and made it a family owned business.

From 1918 to the late 1950’s waterproof boots were not quite waterproof. Think about it, can a boot really be waterproof if someone had to stitch the soles by hand? The Swartz family patent and introduced a new injection-molding technology that revolutionize the shoe industry. This new technology all but eliminated the stitching process. This technology fused the soles of the shoe with the upper leather of the shoe thus producing our first real waterproof shoe.

In 1973 the name ‘Timberland’ was born. Originally ‘Timberland’ was the brand name for the waterproof boots, but because of the boots popularity the company changed its name to The Timberland Company. Throughout the next couple of decades the range of products produced by Timberland grew to include casual and boat shoes and then clothing; all meant to reflect a rugged outdoor style.

The popularity of Timberland boots have risen and take a on an urban image since the 1990's. This image has been created and helped by various hip hop and rap celebrities such as Busta Rhymes, 50 Cent, and Missy Elliot. Still, Timberlands will always be functional and useful as trail and hiking wear and the urban jungle is not the first wilderness that comes to mind when we see a pair of Timberlands.

Price, Equilibrium, Supply and Demand

Prices play an important role in the determining efficiency. Producers and consumers rely on prices as a strong indicator to help bring balance to a market. Economists have theorized that the price of something will move toward a point where the quantity demanded is equal to the quantity supplied. This price is known as equilibrium price or market-clearing price, because it eliminates excess supply or excess demand.

Equilibrium is based on the law of supply and demand. As the price of a product increase, consumers demand less of that product. If the price is too high, the supply will be greater than the demand, and the producers will have an excess of inventor. On the other hand, as the price of a good goes down, consumers demand more of that good and producers will reduce supply entering the market. If the price is too low demand will exceed supply and some consumers will be unable to obtain as much of that good as they would like at that price. We say that supply is rationed.

Here is an example to illustrate the law of supply and demand. For a particular weekend night, we examine the willingness of restaurants in Woodbury, NJ to supply a dinner for two and the willingness of couples to dine in Woodbury, depending on the price of the dinner.

There are three restaurants with the capacity to seat 40 couples. One restaurant provides a nice dinner for $15 a couple, but another requires higher prices for a similar meal. It is more likely that everyone would show up at the restaurant with the cheaper offer but remember there are only 40 seats available.

There are 250 couples willing to go out for dinner, if the price were as low as $12 a couple. Twenty couples would be willing to pay as much as $80, but everyone else requires lower prices. See chart below.

$ Dinner for Two Restaurant meal offered Consumer Demand

$12 0 250

$15 30 200

$25 60 140

$35 60 60

$45 90 50

$65 120 40

$80 150 20

The next section will have a more detailed example of supply and demand as it relates to The Timberland Company.

Price Elasticity of Demand

The Timberland Company is one of the largest producers of boots and premium apparel and accessories for men, women, and children. It is synonymous with prestige, quality and excellence. Timberland is the name of their original waterproof leather boot and because of its vast popularity, the name of the company was officially changed to the Timberland Company. Because the Timberland boot is the top seller, we will focus on that particular product in this portion of the paper.

The Timberland has always been a very popular boot and is still one of the most popular brands of boots. Not only are Timberlands popular amongst many blue-collar workers such as construction workers, exterminators, plumbers, but they are also popular in the urban community for style and fashion purposes. The city of Philadelphia is a perfect example of a community where the Timberland boot is very high in demand amongst the urban community. These boots are sold all over the city in local and mainstream footwear stores all over the city of Philadelphia in all varieties and colors. Here is the elasticity demand table for Philadelphia for the Timberland boot.

Price Elasticity of Demand for the Timberland Boot in Philadelphia

Total Quantity of The Timberland Boot Demand per Week, in Thousands Price per Pair of Boots Elasticity Coefficient (Ed) Total Revenue, in Thousands Total Revenue Test

1 145 145

2 135 8.25 270 Elastic

3 125 5 375 Elastic

4 115 3.5 460 Elastic

5 105 2.2 525 Elastic

6 95 1.8 570 Elastic

7 85 1.3 595 Elastic

8 75 1.2 600 Elastic

9 65 0.86 585 Inelastic

10 55 0.63 550 Inelastic

As with other products, as the price for the product decreases, the demand for the product will increase. By decreasing the price of the Timberland boot by 10 dollars, the demand for the product will increase by 1000 units per week. When revenue is elastic, a price decrease will increase the total revenue ad when revenue is inelastic, a price decrease will reduce total revenue as illustrated in the above table. To maximize total revenue, the Timberland Company should reduce the price of its Timberland boot to $75.00. In this scenario, the demand will be 8000 pairs of boots per week and the total revenue will be 600,000.00 per week.

There are substitutes for some of the Timberland products but the there are few for the Timberland model boot. With so few substitutes, the Timberland boot still reigns as the number one waterproof boot in America. Currently, Timberland makes a good amount of profit with the current price of 145 dollars for a pair for its Timberland boots but to maximize its profit, they should reduce their price which in turn will increase demand.

Marginal Cost and Economic Profit

Total, Average, and Marginal-Cost Schedules for The Timberland Company for the Timberland Boot

Total Product (Q) Total Fixed Cost (TFC) Total Variable Cost (TVC) Total Cost (TC) Average Fixed Cost (AFC) Average Variable Cost (AVC) Average Total Cost (ATC) Marginal Cost (MC)

0 95 0

1 95 85 180 95 85 180

2 95 165 260 48 83 130 80

3 95 235 330 32 78 110 70

4 95 295 390 24 74 98 60

5 95 365 460 19 73 92 70

6 95 445 540 16 74 90 80

7 95 535 630 14 76 90 90

8 95 645 740 12 81 93 110

9 95 775 870 11 86 97 130

10 95 925 1,020 10 93 102 150

Marginal cost is defined as the additional cost of producing one more unit of output. It reflects the costs of producing the last unit of output as well as the cost of not producing the last unit of output which the above table details. Law of diminishing returns is also important in this scenario. It focuses on the marginal product and means while one factor of production increases (labor) while the other (capital) remains constant, the overall returns will decrease after a certain point. Thus, for example, if the Timberland Company added laborers to produce more of the Timberland boot, at some point each additional laborer will add relatively less output than his predecessor did, simply because he has less and less of the fixed amount of capital to work with.

Total, Average, and Marginal-Cost Schedules for The Timberland Company for the Timberland Boot

Total Product (Q) Total Fixed Cost (TFC) Total Variable Cost (TVC) Total Cost (TC) Average Fixed Cost (AFC) Average Variable Cost (AVC) Average Total Cost (ATC) Marginal Cost (MC) Marginal Revenue (MR)

0 95 0

1 95 85 180 95 85 180

2 95 165 260 48 83 130 80 145

3 95 235 330 32 78 110 70 145

4 95 295 390 24 74 98 60 145

5 95 365 460 19 73 92 70 145

6 95 445 540 16 74 90 80 145

7 95 535 630 14 76 90 90 145

8 95 645 740 12 81 93 110 145

9 95 775 870 11 86 97 130 145

10 95 925 1,020 10 93 102 150 145

MC=MR

The above table shows the relationship between marginal cost (MC) and marginal revenue (MR). The general definition states that a firm should produce any unit of output whose marginal revenue exceeds its marginal cost because the firm would make more money selling that unit as oppose to making it. The firm will maximize cost when MC is costly related to MR, in this scenario it would be at 9 units.

The Demand and Revenue Schedules for The Timberland Company for the Timberland Boot

Product Price (P) Quantity Demanded (Q) Total Revenue (TR) Marginal Revenue (MR)

145 0 0

145 1 145 145

145 2 290 145

145 3 435 145

145 4 580 145

145 5 725 145

145 6 870 145

145 7 1,015 145

145 8 1,160 145

145 9 1,305 145

145 10 1,450 145

The Profit-Maximizing Output for the Timberland Company for the Timberland Boot: Total Revenue-Total cost Approach

Total Product (Q) Total Fixed Cost (TFC) Total Variable Cost (TVC) Total Cost (TC) Total Revenue (TR) Profit (+) or Loss (-)

0 95 0 0

1 95 85 180 145 -35 Break Even Point

2 95 165 260 290 30

3 95 235 330 435 105

4 95 295 390 580 190

5 95 365 460 725 265

6 95 445 540 870 330

7 95 535 630 1,015 385

8 95 645 740 1,160 420

9 95 775 870 1,305 435 Maximum Profit

10 95 925 1,020 1,450 430

The above table reflects profit and loss of Timberland based on fixed costs, variable costs and revenue. The Timberland Company reaches its maximum profit at 9 units at 435 dollars in profit which correlates with the marginal cost tables listed above which also shows that the Timberland Company will maximize its profit at 9 units. The break-even point for the above is somewhere around 1 and 2 units which is great because the Timberland company does not have to produce that many units to make a profit. After producing only two units, they have already made a profit of 30 dollars.

Competitive Analysis

This firm is operating in a competitive market environment, that is to say it is a price taker, and competition is a major factor in this market; therefore we need to keep advancing and adding value to our product.

Yes our style is a very unique one, but we still need to keep advancing the product, because our competitors are constantly working on market research to advance their product to suit market taste. In a purely competitive firm like ours, goods are standardized, identical or homogeneous products; the market is producing the same products increasing competition. Because of our price taking nature, we cannot influence the price on the market to a large extent; therefore we stay ahead of the game by making better and more affordable products. A lot of our competitors are producing substitute goods to our product like Nike and Reebok. We therefore need to do more advertising to compete with these giant corporations.

Perfectly Elastic Demand.

Demand by a purely competitive seller is perfectly Elastic, because each purely competitive firm offers only a negligible fraction of the total market supply, it must accept the price predetermined by the market. Because we are a competitive firm, we can sell additional unit of output at the market price, our marginal revenue curve (MR) coincides with its perfectly demand curve (D) and the firm’s total revenue curve (TR) is a straight upward-slopping line. That is to say the more demanded the more the price of our products.

However not all products in a competitive market are perfectly elastic, but a product like ours is. We are marketing a product that has a lot of substitute, very sensitive to price and therefore a careful analysis need to be made before decisions are made.

Design

Timberland product design department is constantly working around the clock, to come up with imaginative designs that will capture more market segment and maintain the existing ones. In so doing we wish to increase revenue and maximize profits.

Price

As discussed earlier the forces of supply and demand force our price upon us, the market forces. No matters what goes wrong in this industry we are hoping to continue to make profit, but in the worse case scenario we at least want to breakeven and continue to operate for the sake of going concern concept.

Macroeconomics Factors of Timberland Store

Because we are in the business of clothing and footwear, weather is a very important factor that influences profits. Today several strategies are being employed to remedy this profit fluctuates. Years ago our products were made mainly for one season, today we are manufacturing products for all seasons. However our peak season is during the winter, when most of our customers know we have the best gear to take them through the winter, during this time our sales increase to 30 millions and more unlike other seasons when sales is 20 millions and less. This company is a very profitable, because in today’s time, Hip Hop clothing is the number one fashion statement for young males, who seek to emulate rappers like Jay Z and Damon Dash. This well-established Timberland Company, located in attractive centers all over the country, successfully caters to that trend by offering high-end urban fashion including casual clothing such as jeans, tee shirts, sweatshirts, and sweat suits, as well as athletic shoes and boots. Our stores are located in all 50 states.

Sector Retail Trade

Industry Clothing’s and accessory store

Franchise No

Sales range 20 millions to 30 millions

Profits 5 million dollars

Profit Type Cash flow

Fiscal Year 2005.

Taxation and Social Policies

Because we are a competitive firm like most industry in the nation our taxes are paid both as a consumptions and savings taxes so an increase in taxes will shift both our consumption and saving schedules downward. Social policies of our company are such that, we develop underprivileged neighborhoods, and bring about opportunities for the poorest of the poorest. We also fund neighborhood projects and school projects. In fact, we are undertaking a new project to empower minorities to take on their own Timberland business.

Inflation and slow economics growth

General inflation problem and slow economic growth of the entire economy can be a negative factor that can pull our profit on the down ward trend. Inflation for instance had lead to the increase price of raw materials, and has affected the total profit of the firm. Slow economic growth has forced us in the past to shut down some of our plants lying off thousands of our work force. These factors have caused us major loss in revenue in the past.

Production Possibilities Analysis

Production possibilities curve indicates the various maximum combinations of products an economy can produce with its fixed quantity and quality of natural, human, and capital resources and its stocks of technological knowledge given that an improvement in any of the supply factors will push the production possibilities curve outward.

This is the same with our company. We are involved with the manufacturing of many products, but only with a limited manpower and resources. Therefore the more of one product we produce the less of the other. Our choice is based on market trend and the current consumer taste. We have a well define market research team studying these factors around the clock, they make market decisions as to what percentage of what is made and how. The normal trend for our company has been making more of the boots than the other products. Because our maximum output is about 100 million if we decided to manufacture 70 million Timberland boots, we can only manufacture 30 million of the other products. And verse versa.

Technological Advance

The importance of productivity growth to this company is very important. Our labor force is a key ingredient to our company’s success. Technological advancement contributes about 40% of productivity growth. Technological advancement includes not only innovative production techniques but new managerial methods and new forms of business organization that improves the process of production.

Economics of Scales

Reduction in per unit costs that results from increases in the size of markets and firms are called economics of scales. Our markets have increase in size, thus allowing the firm to achieve production advantages associated with the greater size of our company.

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