The following appeared in a memorandum from the owner of Movies Galore, a chain of movie-rental stores.
"In order to reverse the recent decline in our profits, we must reduce operating expenses at Movies Galore's ten movie-rental stores. Since we are famous for our special bargains, raising our rental prices is not a viable way to improve profits. Last month our store in downtown Marston significantly decreased its operating expenses by closing at 6:00 p.m. rather than 9:00 p.m. and by reducing its stock by eliminating all movies released more than five years ago. Therefore, in order to increase profits without jeopardizing our reputation for offering great movies at low prices, we recommend implementing similar changes in our other nine Movies Galore stores."
Write a response in which you discuss what questions would need to be answered in order to decide whether the recommendation and the argument on which it is based are reasonable. Be sure to explain how the answers to these questions would help to evaluate the recommendation.
Argument Essay
Movie Galore reccomendations to reverse the trend of its recent decline in profits by cutting overhead costs is rife with unwarranted assumptions and lack of evidence. A lot of questions need to be answered, particularly regarding the respresentibility of the store in downtown, customer preferences and demand conditions of the market where Movies Galore operate.
Firstly, the memorundum offers just one example as evidence of the policy of reducing expenses working to increase profit. Clearly, it is not clear if the downtown store is representative of all 9 other stores. The owner needs to make a case, that such store is typical of all other stores and that implementating such a policy of closing earlier and eliminating old movie stock has worked in other stores. He also needs to answer if for example, that not many people buy old movies or after 6 PM.
Even if the owners contention is that all stores will be able to reduce their expenses by implementing its policy. It is still not clear that such a move will allow Movies Galore to increase its profits. The expenses are just one dimention; the sales being the other. Clearly, closing the store earlier might be a very inappropriate. It might damage sales and hence overall profits. It is very possible that people shop for movies after work or weekends. Conversely, it might be a better idea to open late rather than close earlier.
It is also possible that consumers of the Movie Galore are demand inelastic and brand loyal i.e. they dont change their consumption with increase in prices Or it can be the case that that Movie Galore stores enjoy a monopoly In this case, increasing prices rather than cutting expenses would be a more propitious move. Clearly, the author needs to address issues such as whether there is intense competition for nearby movie stores? And if there are some legislations which do not allow it to open early, or some data on the decline in profits when Movie Galore stores tries to increase profit by raising price? A positive answer to these questions will make his suggestion carry much more weight.
Unless and until these questions are answered. I think it would be fool hardy and might actually do more harm than good to adopt a policy of eliminating old movie stock and closing early.