Blog #3-Mike Derouin

I chose option 3 to make up my own hypothetical company that sells surfboards. The name of my company is Oahu Surf Co. and their target demographic is younger people aged 18-25 that are adventurous and enjoy surfing. We focus on intermediate level surfers that are focused on new and cool products that want to have an edge. The company was founded in late 2014 and is new to the industry. The company is currently focused on making the highest quality and best surfboard on the market, however we would like to expand over the next few years to include more surfing and extreme sports products. Oahu Surf Co. has a large presence in Hawaii, however our boards are manufactured in Pennsylvania.

A. Fixed Costs (In dollars per month):

            Equipment: 75,000

            Admin Costs: 20,000

            Overhead (Rent and Utilities): 15,000

            Total Fixed Costs=$110,000 per month

B. Variable Costs (In dollars per unit):

            Raw Materials: 105

            Labor: 20

            Shipping: 30

            Total Variable Costs per unit=$155

C. Cost Function:

            C(q)  = 110,000 + 155q

D. Price per Unit:

            =$750

            R(q) = 750q

E. Profit Function:

            P(q) = R(q) – C(q)

            P(q) = 750q – (110,000 + 155q)

            P(q) = 595q – 110,000

F. Breakeven Point:

            R(q) = C(q)

            750q = 110,000+155q

            750q - 155q = 110,00

            q = 110,000/595

            q = 185 units to break even

G.

H. Interpretation of the Cost & Revenue Function Graph

The breakeven point is the point where revenue=expenses. At this point, Oahu Surf Co. is neither making or losing money. This can be seen on the graph where the x value, which is the number of surfboards sold, equals 185 and the y value, which is total revenue of the sold surfboards, equals $138,500. Both the revenue function and the cost function have linear slopes.








I.

J. Interpretation of the Profit Function Graph


The profit function has a linear slope, because it demonstrates the direct relationship between number of sold surfboards and the revenue being made from the sold surfboards. It begins below the x axis to demonstrate a loss until enough units are sold that revenue is higher than expenses. This is shown by the break even point at 185 units. At that point revenue and expenses will be equal to one another.








K. Marginal Cost:

            Daily Units = 25 surfboards

            C(q) = 110,000+155q

            C’(q) = 155

The marginal cost will remain the same for every additional unit produced. For the 25th unit produced the marginal cost will remain $155 per unit.

L. Average Cost:

            A(q) = C(q) / q 

            A(q) =110,00 + 155*25 /25 = 29.39

            

M. Marginal Revenue

           R(q)=750-155

            = 595

            

1) The marginal revenue will be higher at q = n because both marginal revenue and marginal cost are constant.

2) The number of units sold on a daily basis will be below the break even point, because the break even point   takes into account all of the costs associated with the production of the surfboards. These costs are typically measured on yearly or quarterly basis, with this being said, the value the break even point does not matter on a daily basis.

3) An increase of one unit more unit per day will lead to an increase in profits for the company.

R(51)=595*51=30,345

C(51)=110,000+155(51)=117,905

Although it would appear that we are still losing money by increasing sales by one unit per day, this is just temporary. As each day passes we will be able to make more money with fixed costs remaining the same for the entire year. With this being said each additional unit produced will keep the fixed costs the same and we will make more money off of each unit produced. We should want to sell as many surfboards as possible.

4) An increase in production will decrease the average cost of producing each surfboard for Oahu Surf Co.

5) Decreasing the average cost of each surfboard will definitely be beneficial to Oahu Surf Co. because the less each board costs the more money the company will make off of each board.

Analysis for the future of Oahu Surf Co.

Based on the information gathered for this experiment I believe that Oahu Surf Co. has the ability to do very well over the next five years. Their fixed costs are relatively low as are their variable costs needed to produce their boards. Looking at the numbers Oahu Surf Co. is doing I believe the outlook is very positive. If they continue to sell 25 surfboards a day (which is a relatively conservative estimate) they would bring $30,000 in revenue a day with fixed costs at $110,000. This would leave plenty of room to make a profit. As long as they are able to market their products well and continue to evolve and diversify as a company, I believe they could do very well. I have also found that as the economy continues to improve more people have the ability to spend money on hobbies and sporting goods. So as long as the economy remains strong, the company continues to be a hip and likable brand, and they continue to focus on their target demographic Oahu Surf Co. has the ability to become a very successful and widely recognized brand in the young, extreme sports industry.