Blog Assignment #3

The hypothetical company that I made is called CustomDesigns. They are a clothing company that manufactures custom-made T-shirts. Their target demographic are teens that are in high school that want to wear non-brand name t-shirts. Since the early part of the decade, the hipster age has increased the demand for “non-brand” name clothing. Thus, CustomDesigns targets kids that want high quality custom made t-shirts without sacrificing the need for excessive branding and logos. Through CustomDesigns, we hope to better market family-owned businesses while bringing teens to shy away from brand names such as Hollister and Abercrombie & Fitch. We aim to bring high quality T-shirts for kids to wear. Our mission is to bring the good old American made clothing back to the States because more and more clothing are being outsourced to countries in Asia.

1. Fixed Costs (In dollars per month):

            Equipment: 2,000

Admin Costs: 1,000

Overhead (Rent and Utilities): 2,000

Total Fixed Costs: 5,000

2. Variable Costs (In dollars per unit):

            Raw Materials: 5

            Labor: 3

            Shipping: 2

            Total Variable Costs per unit: $10

3. Cost Function:

            C(Q)=5,000 + 10(Q)

4. Price per Unit

            = $30

            R(Q)=30(Q)

5. Profit Function:

            P(Q) = R(Q) – C(Q)

            P(Q) = 30Q – (5,000 + 10Q)

            P(Q) = 20Q – 5,000

6. Breakeven Point

            R(Q)=C(Q)

            30Q = 11,000 + 10Q

            30Q – 10Q = 5,000

            Q = 250 units to break even

7. Marginal Cost

            C(Q)=5,000 + 10(Q)

            C’(Q)= 10

8. Marginal Revenue

            R(Q) = 30 –10 = 20

           

L. Average Cost

            A(Q) = C(Q) / Q

            A(Q) = 5,000 + 10(75)/75 = 76.6667

Sorry to have all the pictures down here. It proved difficult to format. I apologize for the inconvenience!

The marginal cost is constant as stated. Even at the 75th T-shirt produced or even the 75th T-shirt produced, the marginal cost will stay at $10 per shirt/unit. 

Interpretation of the cost & revenue graph:

This graph exemplifies that the break even point is where revenue equals costs. This shows the direct relationship between the number of shirts sold in comparison the the profit. At the break even point, this is where the company's fixed costs break even with the profit made from the shirts. 250 is the number of shirts produced and sold and 7500 is the money made from that. 

The profit function shows that at 250, the company will start making a profit. Since the company lost money at the beginning due to fixed costs, the company need to produce and sell 250 shirts to start gaining profit to make up for the fixed costs. Thus, this graph exemplifies that fact. 

A. Marginal Revenue will be higher because MC and MR are constant. Thus, marginal revenue will be higher than marginal cost at all points.

      B. The number of units sold daily is before the break even point. This means that it will  take some time for the company to profit after incurring its fixed costs. Since the units produced daily is 75, once we produce 250 shirts in about 3 1/3 days, we will have produced enough shirts to meet the break-even point. Provided we sell all the shirts produced, which we will, we will start gaining profit from the business even if we did incur fixed costs.

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      C.  If production is increased by one extra quantity per day, will lead to more money for the company because

Revenue: 30(75+1) – 30(75) = 30

Cost: 5000 + 10(75+1) – 5000 +10(75) = 10

R-C=20

The cost of making the shirt is constant. So for every shirt we make, the company gains $20. Thus, increasing production by one extra quantity per day, we will hit our break-even point faster. Thus, we will make more money given that the revenue for each shirt is $30 and it is only $10 to produce. We will definitely continue to make money as a company if production is increased by one extra quantity.

        D. Because MC<AC, then increasing production decreases the Average Cost.

        E. Decreasing average cost will be good because the less it costs to produce each shirt, the profit margins for the company will be higher. 

        FUTURE OUTLOOK: At the rate it is going, CustomDesigns will be one of the most successful clothing companies in the area. With a constant rate of marginal cost and marginal revenue, there is no bleak outlook in the future of selling T-shirts geared towards teens that like American-made non-brand clothing products. Because of the crucial fact that the marginal revenue and cost will be continual, if CustomDesigns sells every t-shirt produced and incurs no major accidents and costs in the future, there will be great profits to be made in the near future (5 years). 

      However, with some social reasoning, there will be drastic problems. While all will be good if CustomDesigns continue to sell its t-shirts, there may be a drastic change in social dynamics that might make kids want brand-name t-shirts. Thus, in that case, we might lose money because no one will want CustomDesigns' no-name t-shirts. In the case that none of that happens and we continue to sell everything, CustomDesigns will be very successful and one day overtake every other brandname clothing shop.