Bus 640 Managerial Economics I need help with this problem T

Bus 640 Managerial Economics I need help with this problem.

Two partners own together a small landscaping business in North Carolina, called Summer Lawn Care. They have been specializing in summer grass seeding, installation, and maintenance. Recently, the partners acquired special technology and know-how for winter grass installations and maintenance. They also added a tree cutting service as recent storms in the area had caused demand for this service to soar. One of the partners insists that the name of the business should change to Lawn and Tree Care, so that it better reflects the range of services and, thus, generates more customer interest, and thus contracts. The second partner wants to keep the old name and argues, “We have already paid for business cards, vehicle paint, signage, and ads in Yellow Pages”. Evaluate the arguments of the two partners. Explain and illustrate their points by identifying the relevant and irrelevant costs for this decision.

Solution

The first partner is arguing on the basis of brand identity of the firm, while the second partner is speaking in terms of incremental costs.

While the first partner is correct in changing the firm name as to reflect the umbrella of services offered, which will help in bringing and acquiring new customers, the second partner is logically defending the firm\'s financial scenario. Changing the firm\'s name will result in additional expenses before generation of new revenue. On the other hand, existing customers are aware of the services provided by the firm and will not much care about the name of the firm, since they are already aware of the firm\'s service and quality.

At an overall level, both partners are correct in their own viewpoints.

The \"Middle-of-the-Line\" solution lies in the firm being run as Status Quo, without any change at present. As new customer acquisitions pick up and additional revenues start bringing in incremental profits to business, the name change should be considered out of the incremental profits. Immediate change in name will result in unwarranted sunk costs which cannot be recovered, and will lower the firm\'s bottom line.