Lorex Computing

Marginal analysis

Lorex Computing is a company at the heart of the Silicon Valley specializing in the making of computers and computer accessories. The company was started in the year 2002 by Mark Cahill after noticing a gap in the market for the production of personal computers.

Since then, the company has cut itself a niche in the market and is now one of the leading producers of both computers and the necessary accessories in the whole world.

Fixed costs for the company

The fixed costs of the company accrue to a value of $8 560 per day. This is inclusive of individual expenses like rent and the heating in the company’s headquarters which doubles up as the main production facility.

Variable costs for the company

In the production of a complete PC set, the company spends up to $80 in variable costs.

For a complete PC, the buyers can obtain them for $200 apiece.

Thus, the cost function will be $8 560 + 80q.

 The revenue function for the company will be $200q.

The profit function will be 200q-(8 560+80q).

The break-even value

The break-even value will be when $200q=$8 560+80q

This equates to 120q=$8 560

Which gives us the value of q as being 71.333 and of the cost/revenue as being $14 266.

This is the break-even value.

Using 72 as the number of items produced, we can have a graph as follows:

 Graph showing the break-even point, revenue and cost functions:

Explanation for the break-even point on the graph

The break-even point on the graph can be described as the value of revenue that equals the value of costs incurred.

It is the least amount of money that the company has to make so as not to make a loss.

In the graph, it is the point at which the Revenue function and the Cost function intersect.

  

The profit function graph:

Explaining the profit function:

The profit function shows at what point the company starts getting any profits. In this case, the profits will start coming in after the production of 72 PCs. When the company is making zero Personal Computers, they are making a negative profit of $8 560.

Marginal cost for producing 85 units:

To produce 72 PCs, the company would incur a cost of $14 400.

In the production of 85 units, the company is incurring a cost of $8 560 + (85*80).

This totals to $15 360.

So, the cost of producing of 85-72 items is $15 360-14 400.

This equals $960.

The marginal cost becomes 960/13, which is $73.84.

Average cost of producing 72 PCs is ((72*80)+8560)/72.

This equates to $198.889

Graph of Average cost and Marginal cost:

Is the marginal revenue greater than the marginal cost at q=n? Why?

The marginal revenue is greater than the marginal cost at q=n. This is due to the fact that any additional production doesn’t increase the overhead costs of production.

The number of units that are sold daily is before the break-even point. This means that the company can continue surviving since the revenues accrued are more than the costs incurred in the production.

Will the company still make profit if they increased their productions?>

The cost of making 72 PCs is $14 360.

The cost of making 73 PCs is (73*80) + 8560=14400.

The extra costs incurred is $40.

The revenue from selling 72 PCs is 14 360.

The revenue from selling 73 PCs is 14 600.

The extra revenue is $240.

Profits are 240-40=$200.

The company will continue making profits if they were to increase their productions.

Does average production cost decrease with increased production?

The average cost for producing 73 PCs is $14 400/73=$197.26

The average cost in the production of 72 PCs is 14360/72=$199.4

 Thus, an increase in production of PCs decreases the average costs of production.

An analysis on whether the company will thrive in the next 5 years

The company will thrive in the next five years. This is due to the supporting evidence that the company is making profit provided they make more than 72 PCs every day. Also, should they consider increasing the number of PCs they are producing every day, they will gather more profits per unit volume of PCs produced.