Blog 3 Hashim's Coffee (by Juan Aquino

Part 1:

            Due to the high demand of inexpensive and high quality coffee that can compete with Starbucks in quality and prize, Hashim a recent college graduate has started his own coffee delivery startup as a side business. The idea is simple, he would deliver high quality coffee with the best blends and materials to the students during the late night hours  while they study. Students who would not want to leave the library and are tired of having the same starbucks coffee or similar brands from the library could now have delivered without leaving the library their own delicious personalized coffee. Hashim while creating his company decides that in order to be successful he must control his variable and fixed costs and also make sure that he is spending his revenue in the correct way.  Hashim has estimated fixed costs to be around $30,000 (See list below) for the delivery of the exotic blends and variable costs are going to be $2/q depending on how much money he makes.  Hashim currently sells the coffee at $5 and expects that with the late night demand and convenience of his services his company will be successful. Its been five months since he started his business and he has sold over 20,000 coffees across different campuses in the DC area

Part 2:

List of Fixed Costs:

1)   $1,000 for transportation costs

2)   $15,000 for coffee ingredients and blends

3)   $4000 for employee salaries

4)   $10,000 rent and equipment

Cost function: C(q)=  30,000 + 2q

Revenue Function= Price x quantity= 5(q) 5(20,000)= 100,000

Profit Function= Revenue- Costs = 100,000-70,000= 30,000

Break even point= 0= 100,000 – 2q+5q

                                                3q=100,000

                                           q=33.33

When they sell 33 coffees the company will be at its breakeven point and will start to make a profit after that quantity.  If Hashim sells less than  units of his coffee blend then the company will be operating at a loss and there will be no profit.

Part 3:

·      Due to Hashim working in his startup only during the night he will only make coffee once it is ordered to make sure he does not make most of his products. He is making around 50 coffees per night. The marginal cost is 5 dollars per unit of coffee. To produce the 50th coffee of the night it will cost him around 5 dollars to make the next unit.  

Average Cost Function=  5(50) + 30,000/ 50 =  1.008 is the average cost per unit.

    The marginal Revenue is greater than the marginal cost when the 50 units are produced in order to be profit we must make sure that MR> MC. Also since it is so inexpensive for Hashim to make the coffee at a current 1.008 price per unit and a sell value of 5 dollars,he is making much more than what it actually takes for him to make the coffee at its current value. 

  

      Part 4:

       Given the fact that Hashim's coffee business is one that does not require a lot of specialized skills but requires a lot of deman i expect that if the numbers continue to be similar to what he is selling now, that Hashim can have a succesful coffee business during the nights. If he wishes to expand his idea in the future and begin to handle much larger orders it is important for him to make sure that his fixed costs do not increase significantly. If he starts to have higher fixed costs but continues around a similar revenue stream he will begin to operate at a loss. Also, he must insure that he does not get any competition in his delivery service since coffee can find easy substitutes since there is so much competition in the industry.