Blog 3 Rafael Cabrera

Blog 3

Marginal Analysis

Part I

Dominicana Benz is the leading distributor of classic and antique Mercedes Benz parts in Central America and the Caribbean. It also exports to North and South America, Europe, and Australia. The company, owned by a group of investors and Mercedes Benz aficionados, serves as a subsidiary of Mercedes Benz and has its main office in Santo Domingo, Dominican Republic. Dominicana Benz offers a variety of parts, enough to build entire models from 1950 to 1995. Based on inventory of 150,000 parts and price per unit of its different products, Dominicana Benz puts the average unit price at $100, and distributes 12,000 units every month. Its current customer base is also of 12,000 members including individuals, businesses, and classic car clubs and associations, with increments of 115 members every month.

Part II

Fixed Costs (Monthly):         $90,000                                                                                              

Rent: $35,000

Salaries: $50,000

Truck maintenance: $5,000

Variable Costs (Monthly): $6

Packaging materials: $3 per item

Monthly newsletter: $3 per customer

Price Per Unit:

$100

Cost Function:

Fixed costs () + (variable costs () * quantity ())

C (q) = 90,000 + 6q

C (q) = 90,000 + 6 * 12,000

C (q) = 90,000 + 72,000

C (q) = 162,000

Revenue Function:

Price () * quantity ()

R (q) = 100q

R (q) = 100 * 12,000

R (q) = 1,200,000

Profit Function

P (q) = R (q) – C (q)

P (q) = 100q – (90,000 – 6q)

P (q) = 94q – 90,000

P (q) = 1,128,000 – 90,000

= 1,038,000

Breakeven point

Fixed Costs/Price - Variable Costs

90,000 / (100 – 6)

= 90,000 / 94

= 957 units must be sold to breakeven.

Part III

Although no items are produced inside of the offices, 150 units are purchased by the business to resell for a profit, therefore, q=150. Also, units are purchased at half of the price ($50) they will be sold at in Dominicana Benz. Therefore, the cost (marginal and total) of producing additional units remains constant.

An increase in production, or purchases in this case, would not affect price, since they are obtained through a third party who sells at half of what Dominicana Benz sells for.

Since the costs of production are constant, decrease in other costs would be beneficial for the business since what is saved can be turned into revenue.

Part IV

Based on the provided information, if everything remains constant, the company will do well off in the next five years. This is because its costs of production, as well as fixed and variable costs of the business are way less than the revenues. Since Dominicana Benz will always sell double of what they purchase, as long as they have a strong customer base, they will do well.