Blog #3 Ibrahem Awad

Origami Fun Inc. is a company founded in 2005 and and is now the world’s leading producer for origami crafts. Origam Fun sells to everyone, ranging from school children doing art projects in Canes, France to corporate events in Silicon Valley, California. The three Lin sisters worked in the tech industry in Japan before discovering their love and talent for origami art. Although founded in Tokyo, Japan the company now operates in Dallas, Texas.

Fixed Costs ($):

            Property Tax: 8,000

            Heating/AC: 5,000

            Insurance: 10,000

            Salaries: 50,000

Variable Costs ($);

            Raw Materials Per Unit (Paper): .60

            Labor Per Unit: .33

Selling Price ($):

            Origami: 1.50

Cost Function:

            C(q)  = 73,000 + .93q

Revenue Function:

            R(q)= 1.50q

Profit Function;

            P(q) = R(q) – C(q)

            P(q) = 1.50q – 73,000 – .93q

            P(q) = .57q – 73,000

Breakeven Point;

R(q) = C(q)

1.50q= .93q +73,000

.57q=73,000

q=128070 units to break even ($192,105.26)

Graph Interpretation;

            The break-even point is when the cost of operating is equal to the revenue generated. The revenue function has a slope of 1.50 because that is the revenue—in dollar amounts—generated from selling one more unit (Marginal Revenue). The slope of the cost function is not as steep because the cost of producing one more unit is .93 cents (Marginal Cost), giving it a lesser slope than that of the revenue function. The cost function also starts at 73,000 due to the fixed cost amount hile the revenue function starts at the origin of the graph because it is possible to not generate any money, but not possible to eliminate all fixed costs.

The Profit Function Graph:

On the profit graph, the point that the function cuts through the X-axis is the break-even point. At that specific point, Origami Fun has generated enough revenue to cover its expenses and any orders of origami after this point will generate profits. The graph starts at -73,000 for that is the fixed costs amount. The graph maintains downward concavity until the company begins to generate revenue from operating. The graph proceeds to concave up as Origami Fun generates more money to cover expenses. Eventually, the graph intersects the X-axis, generating enough revenue to cover all expenses and make profit.

Marginal Cost;

            Daily Units = 500

            C(q) = 73,000 + .93q

            C’(q) = .93

            Marginal Cost is constant, to produce the 50^th unit costs ¢.93

Average Cost

            A(q) = C(q) / q

            A(q) = 73,000 + .93(500) / 500 = $146.93 per unit

           

Marginal Revenue  = $1.50 per unit

            

Marginal Revenue is higher at q = n because both marginal revenue and marginal cost are constant.

Daily Units; The actual number of origami crafts ordered a day are below the break-even point but this is irrelevant over a year’s span, considering that most of our fixed costs come from yearly expenses (i.e. Salaries, Insurance, etc.). Approximately 70% of the year (257 days) is spent covering the costs of operating while the remaining 108 days of the year are spent making a profit.  

Increased By One Unit:

            

            R(501) = 1.50 X 501

            R(51) = 751.5

            C(501) = 73,000 + .93(501) = 73465.93

As formerly mentioned, the costs are accumulated over a yearly basis so although it may appear that Origami Fun and the Lin sisters are losing money day after day, after the 257^th day they start to generate profit which is difficult to see given the math.

Increase in Production at q = n;

If average costs are more than marginal costs, increasing production will drive down average costs and since that is the dynamic of this company, increasing production will decrease average cost. Less average cost is beneficial because the less a company pays per unit, the more likely they will produce more units, in turn making it cheaper to produce those units.

Future Analysis:

Within the upcoming five years total revenue generated should approximately be $1,368,750 while fixed costs will be $219,000 and variable costs equaling an unpleasant $848,625. The numbers speak for themselves, and they are not sounding to optimistic. This company will only make $301,125 dollars profit… WITHIN THE NEXT FIVE YEARS. This is all given the assumption that business will continue to operate at the same efficiency (or inefficiency), charge the same price, and pay the same amount for variable and fixed costs for the next five years. The costs are not that relatively high compared to other industries, so stability is definitely a benefactor in this case however, if one were to analyze the profit on a yearly basis it only comes out to be $60,225, split amongst three sisters: $20,075. I am sorry to say Lin sisters; you’re better off at McDonalds.