Blog #3

The Company History and what we do

Skate Rim is a company that specializes in the making of inline skates. Over the years, Skate Rim has created one of the fastest-growing sports in the around the world, still continuing to maintain market leadership in the sale of inline skates.

Started in the late 1980s by Mark Hovec and Bill Salinger, the company has risen, over the years to the world’s leading producer of inline skates. They refined some old skates, started assembling the very first of their kind of inline skates in the barn of their parents’ home and shortly after founded the company. This would become the now widely-known as Skate Rim.

In the early 80s, the business grew largely even though the inline skating market was quite underdeveloped. Marketing strategies were put in place to ensure that more sales were obtained.

In the late 90s, the demand for inline skates was increasing rapidly, and the distribution to international markets was introduced.

The Company Fixed Cost

• Rent: 2500
• Equipment: 12000
• Furniture: 3000
• Licenses and permits: 1450
• Utilities: 1000
• Miscellaneous: 1250

This all amounts to $21 200.

The Company Variable Costs

The cost of producing one additional unit of goods = $17 Per Item

Price for a single unit of good

Price per unit = $52.99

The cost function

Fixed costs (a) + (variable costs (b) * quantity (q)) 

==> $21 200+17q

The revenue function

Price (p)*quantity (q)

==> 52.99q

The profit function

• 52.99q-(21200+17q)
• 52.99q-17q-21200
• 35.99q-21200

The break-even point value

The break-even is when the total costs and revenues are equal:

• 21200+ 17q = 52.99q
• 21200 =52.99q-17q
• 21200 =35.99q
• 35.99q=21200
• Q=589.0525 thus q=590.

The cost function / The revenue function Graph

The break-even point Graph Meaning  

The break-even point is the point where the total cost of production and the total revenue are equal.

In our graph, the marginal point is where the company produces at least 590 items. This will bring in revenue that is equal to the total cost of producing the items, which is $ 31264.

Marginal cost is the additional cost of producing one extra item. In the graph, this will happen only after the company has produced at least 590 items. The extra cost that will be incurred for each production unit is known as the marginal cost.

Marginal revenue is the additional revenue that will be generated by increasing the product sales by a single unit. In our graph, this will be the revenue accrued after selling any extra item when 590 items have already been produced.

Profit function graph showing the break-even point

The Profit Function Graph Meaning

When the company has produced just 590 items, the profit accrued is $0.00.

When the company has produced no item, the standing costs are considered a loss since the company accrues them with no revenue obtained. In this case, the profit function is in the negative. For any items that are above the 590 produced, profit starts flowing in. Thus, the profit function is positive.                          

The marginal cost of producing the nth item

Cost for producing 590 items is (590*17) + 21 200= $31 230.

This is the revenue at the break-even point.

To produce 630 units, we will incur a cost of 21 200 + (630*17) =$31 910

The cost of producing (630-590) items is 31 910-31 230=$680

The marginal cost is 680/40=$17

The average cost of producing the nth unit

The total cost of producing 590 units is $ 31 230.

The average cost of producing a single unit is $50.65.

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

The Marginal Cost Against and The Average Cost Graph

The marginal revenue

The marginal revenue is greater than the marginal cost of any additional production of the items does not increase the fixed cost of production.

The number of units sold daily

The number of units produced daily is after the break-even point. This means that the company is producing more items than those necessary to keep them from making loss.

Will the company continue to make money if the production is increased by one extra quantity per day (i.e. if q = n + 1)) w

The cost of producing 630 items is $31 910.

The cost of producing 631 items is $31 927

The difference is $17.

The revenue from selling 630 items is $33 383.7

The revenue accrued from selling 631 items is $33 436.69

The extra revenue is $52.99.

The profit obtained is 52.99-17=$35.99.

The company will continue making profits with the additional production of another item.

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

The average cost of producing 631 items is $31927/3= $50.5.

The average cost of producing 630 items is $50.75.

Thus, an increase of production decreases the average costs for the company.

Would Increasing or Decreasing Average costs be better for the company.

Decreasing the average costs would be better for the company. This is because the marginal profits would be bigger, thus making more money for the company.

What the company will do over the next five years based on the information above. 

Should the company continue producing 630 items, the company will continue making profits should all the production costs remain constant.

Will the company will thrive, struggle or tank within the next five years.  Give mathematical and economic/social reasoning for your explanations.

The company will thrive. Since they are making $33 383.7- $31 910 per day. However, the company should consider increasing its production since there is more marginal revenue than the average revenue.