Baxter Black
3/30/15
Professor Little
Blog 3
Part 1
Oasis is a new company in Seattle that is focused on
manufacturing and selling a new design for outdoor hydration/filter systems. There
is one product that the company makes. It is called the cleanbak. The cleanbak
looks like a camelback but it has three chambers. Dirty/new water is placed in
chamber one. As the customer drinks through the mouth piece (similar to that of
contemporary dromedaries) the water is pulled through a series of filters into
chamber two, then another series of filters into chamber three where the water
is then safe to drink.
Part 2
·
Total fixed costs: $2,346,000
o
Office lease: $25,000
o
Manufacturing contract (with Foxxconn Taiwan):
$50,000
o
Office supplies (furniture, internet, heating,
water, miscellaneous items, computers, etc..): $21,000
o
Employee salaries: $2,000,000
o
Advertising: $50,000
o
Research and development: $200,000
·
Total variable costs: $27
o
Raw materials: $10 per unit
o
Manufacturing charge: $7 per unit
o
Shipping: $10 per unit
·
Retail price per cleanbak: $120
·
Cost function: C(q) = 2,346,000 + 27(q)
·
Revenue function: R(q) = 120(q)
·
Profit function: P(q) = R(q) – C(q)
·
Break-even point value: 25,226 units; (25,226,
3,027,102)
o
2,346,000 + 27(q) = 120(q)
o
2,346,000 = 93(q)
o
Q = 25,225.8
·
See paper (photo)
·
The break-even point is the number of sales at
which the firm begins to make money on the sales of its products. The slope of
the cost function is representative of marginal cost. The slope of the revenue
function is representative of marginal revenue.
·
See paper (photo)
·
On the profit function graph the break-even
point crosses the x – axis at the point (25,225.8, 0). The interpretation of
this is that when 25,225.8 units have been sold the profit of the firm is zero.
As more units are sold the graph moves into the first quadrant and y values
(money made in sales) becomes positive.
Part 3
·
Q = 80 units
·
See paper (photo)
·
Marginal cost of producing 80 units: $2,160. Per
unit marginal cost is $27.
·
Average cost of producing 80 units: $2,348,160.
Per unit average cost is $29,352
·
See paper (photo)
1.
The marginal revenue is greater than the
marginal cost at q = n because marginal cost does not factor in the enormous
fixed costs.
2.
Q=n is before the break-even point. This means
that the company does not profit from one day of sales.
3.
If production is increased by on extra quantity
per day the firm will continue to profit. This is because the marginal revenue
of 120 dollars exceeds the marginal cost of 27 dollars. In the formula R(q+1) –
R(q) – C(q+1) – C(q) the difference being added will always favor revenue
because their marginal values are consistent (revenue is larger than cost).
4.
An increase at q = n in production reduces
average cost for the firm.
5.
Decreasing average costs is better for the
company because it makes for a wider profit margin.
PART 4
· - The company’s high startup costs appear daunting
to their prospective success. The product is priced at a point where only
people who are committed to the use of the product will purchase it. This high
price point has its downsides (not many people will buy it) but also its
upsides (not many people need to buy it for the company to break even). The company’s
success will be entirely dependent on how well they can market themselves. The budget
for advertising and marketing is open to revision.
·
-The company will struggle to break even during
its first year as it fights for market share and spends large sums of money on advertising
and endorsements. These high startup costs will go away once word of mouth can
become an established marketing tool. The company is also coming into the
market with a new product that will be cause for skepticism. However, their
fortunes will change over the next four years and cleanbak will find a
comfortable niche market selling its products to adventurers and military’s
around the world. The company has higher chances of success if they are able to
research and develop additional new products.
Very clear with great analysis and detail. Great job! I liked how you went into willingness to pay and the features of the product.
ReplyDeleteGreat job! delivered you point clearly.
ReplyDeletebaxter,
ReplyDeletegreat product idea! i would totally buy this if it were real. great job of breaking down all of your materials and costs in a nicely organized manner. you were very detailed and i can tell you took your time to research and think about all that would be involved in selling a product like this. also, nice job of remembering to include your units in most parts of your calculations.
you did forgot to actually write out what the profit function is and also, your graph for the slopes of the average cost vs the marginal cost is incorrect. mc should have a slope of 27 and start at $2,346,000. other than those things, nice job. =]
professor little