Blog #3

Asma Aljarbou

Blog #3

3/30/2015

Part one:

For this blog I will create my own hypothetical company and my company is small bakery called Yummy Ammy.

Yummy Ammy bakery is located at Crystal City, Virginia, USA. Marry and her daughter Alyssa invented this bakery in 2003, and since then they work together in this bakery to bring their passion of baking to all people of Crystal City. However, sells were not going very well during the summer so they are trying to invent new way to use ice cream with baking goodies. So they decide to bake a cupcake that will be stuffed with a customer choice of vanilla, chocolate or strawberry ice cream.

Part two:

·    Find total fixed costs--Start up costs (if you can, try to get/make a list of start up costs and dollar amounts. For instance, heating a building, rent, supplies, internet, etc.)

·       Fixed cost is rent=$3,000 per month, salaries=$6,000 per month and utilities=$500 per month and the total fixed cost is $9,500.

·     Find variable costs—cost for producing one additional unit/quantity of good

·       Variable cost =$3 per cupcake

·    Determine the price for which the company sells a unit/quantity of good (this will be needed to determine the revenue function. If the company sells one unit for $250, then the revenue function will be R(q) = 250q)

·       The price of selling one cupcake is $5.

·    Find the cost function

·       Cost function will be fixed cost + variable cost , C(q)=$9,500+$3q

·    Find the revenue function

·       R(q)=$5q

·    Find the profit function

·       Profit Function is P(q)= R(q)-C(q), P(q)=$5q-$9,500+$3q --> P(q)=$9,500+$2q

·    Determine the break-even point value

·       BE point= ($5q=$9,500+$3q)--> $2q=$9,500 --> q=4,750

·    Graph the cost function and the revenue function on the same grid and mark the break-even point and its value on the graph

·        

·    Interpret the meaning of the break-even point on the graph and interpret the graphs themselves in terms of slope (i.e. marginal cost and marginal revenue

The breakeven point is where the cost of producing products = the revenue of producing those products and from the graph when the R(q)=C(q) the point the interact is the breakeven point. Also from the graph we can see C(q) and what determine this line is the slope of the cost which is the $3 the bakery need to spend to make cupcake. On the other hand, R(q) line represented by the slope of $5 the baker will earn by selling one cupcake.

·    Graph the profit function on its own grid and mark and interpret the break-even point and its value on the graph

·        

·    Interpret the meaning of the graph of the profit function

The profit function graph start at the origin of the graph and goes in until it reach the breakeven point where after this point the bakery is making profit but before that they are not making any profit.

 Part three:

·    Determine how many units of the product are produced on a daily basis (so q = n, where n is the number of units produced daily.  For instance, maybe n is 150, so q = 150 units)

I will assume that Yummy Ammy bakery produce n number of cupcake and since n=q

 --> N=500 so q=500 cupcakes.

·    Plot the point of the number of units produced daily on the cost and revenue graphs

·        

·    Determine the marginal cost for producing the nth unit (where q = n is the number of units produced on a daily basis. so, if n from above is 150 units, find the marginal cost for producing q = 150 units)

Marginal Cost:

C(q)=$9,500+$3q

C’(q)=$3

C’(500)=$3 the marginal cost is constant.

Find the average cost of producing the nth unit (where q = n is the number of units produced on a daily basis. so, if n from above is 150 units, find the average cost for producing q = 150 units)

Average Cost:

·       A(q)=C(q)/q

·       A(q)=9500+3(500)= $6.33 per unit

Marginal revenue:

R(q)=$5q

R’(q)=$5 per unit

·    Graph the slope of the marginal cost of q = n and the slope of the average cost of q = n on the same grid

1) Is the marginal revenue less than or greater than the marginal cost at q = n? Explain.

 At q=500 MR>MC because no matter what q we have the marginal cost and the marginal revenue are constant we MR=$5 and the MC=$3.

2) Is the number of units sold daily (q =n) after or before the break-even point? What does this mean?

The number sold daily is before the breakeven point where the bakery sells 500 cupcakes per day, and BE point is 4750 cupcakes. So the bakery needs to produce more to units in order to make profits. However, if we talk about the breakeven point then we consider the fixed cost, which is annual cost

3) If production is increased by one extra quantity per day (i.e. if q = n + 1)) will the company continue to make money? Explain.

The company will still make profit if they increased the production by one extra unit

R(501)=5x501=2505 --> R(q + 1) – R(q)=2505-2500=$5 and C(501)= 9,500+3(501)= 11,003 --> and C(q + 1) – C(q)= 11,003-11,000= $3.  

4) At q = n, does an increase of production increase or decrease the average cost for the company?

Because MC<AC then the increase of production will probably decrease the AC.

5) Explain whether increasing or decreasing average costs would be better for the company.

By decreasing the average cost that will help the company to be better for the bakery because the lower the bakery pays per unit the more producing unit in lower cost.

Part four:

Provide an analysis of how you think the company will do over the next five years based on all of the information you have gathered from your experiment. 

Future analysis:

Based on my assumption analysis of the bakery for the next five years the bakery will probably have a total of ($570,000) Fixed cost, ($624,000) Revenue and (374,400) variable cost however since they will have ($259,100) profit I think that the bakery will struggle through the next five years. They need to accommodate new way to reduce the fixed cost of the company maybe change the store location that will lower the rent for the store and try to use less labor.

Thank you