Blog 3

Part 1

WinterX

Winter X is a new start up company that produces rain boots in all colors and sizes. Its unique selling point is the material it uses, for the boots, along with the fur it has to warm people and make them feel comfortable wearing those boots. This company is established in Washington DC. During the winter, it gets very cold , and the company wants to provide a product that the weather in this area demands. If things go well, then it might grow its products and its locations.

Part 2

Total Fixed Costs:

Rent: 8,000

Utilities: 4000

Property taxes: 3000

Interest expense: 2000

Insurance: 3000$

Total fixed costs: 20,000$

Variable cost (per unit):

Direct materials: 40$ 2 square meters of leather

Supplies: 35$$

Direct labor: 25$ 5 hrs of labor per boot

Total variable costs: 100$

Price at sell for one unit: 150$

Cost function:

fixed costs  + (variable costs ) * quantity 

20,000 + 100q

Revenue function – total revenue from selling a quantity of some good

price * quantity 

R(q) = 150q

Profit function – revenue – cost

P(q)=R(q) _ C(q) =

150q – (20000+100q)

Break-Even point :

-Fixed Cost/ contribution margin.

Find C.M = Selling Price-Variable Cost

                        150-100 = 50

BE= 20,000

            50                                           

      = 400 pairs of boxes are needed to sell in order to cover my total cost of production.

Revenue and Cost

The break-even point on the graph is shown by the small blue diamond symbol, and it is the value at which the revenue =cost, when 400 units are produced. As more unites are produced after 400, the marginal revenue is exceeding the marginal cost.  The marginal revenues graph is steeper, and continues to grow at a steeper rate than the cost graph Therefore for an extra unit produces after the breakeven point, more revenue is made compared t o the cost.

Profit Function

The break even point marked in the blue diamond, is the value of zero profit. This means that any quantity after 400 will result in a profit as shown by the graph, and any quantity below 400 will result in loss. We can see that when q= 400, the graph is positive and above the x-axis, while the graph below q=400, is negative and below the x-axis.  Therefore a profit function, determined the value at which a certain quantity of production will start making profit.

(Part three)

Units produced Daily are Q=  30

·      Determine the marginal cost for producing the nth unit :

Marginal cost= 100
marginal cost = change in total cost

Change in variable cost

23000-22900/ 1 =100$

·      Find the average cost of producing the nth unit :

Average cost= total cost  =           23000  = 766.66

                        Total quantity            30

1)    Is the marginal revenue less than or greater than the marginal cost at q = n? Explain.

Marginal revenue at q=30 is. Marginal cost at q=100. Therefore the revenue exceeds the cost . 150>100

2)    Is the number of units sold daily (q =n) after or before the break-even point? What does this mean?

The number of units sold daily is 30 pairs of rain boots. This is before the breakeven point , which is 400.  This means that after 13.3 days I will break even where my TC=TR, and after 13.3 days I will be making a profit as shown in the revenue and cost graph.

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

Yes if I make 31 boxes a day instead of 30 boxes the company will continue to make money. The total average cost will decrease, while the marginal cost will stay the same, and the revenue would increase.

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

An increase of production will decrease the average cost for the company. New average cost will be = 23100/31 =745.1, instead of my current average cost which is 766. That's because we are dividing the denominator by a larger quantity. The numerator or of this equation also changed but only by a small quantity.  The more units you produce the less your average cost will be.

5)    Explain whether increasing or decreasing average costs would be better for the company.

Decreasing average costs will be better for the company. Since they will be able to produce their products at a lower rate, and therefore make more profit.

Part 4

This company is new start up company, if it continues to grow at the same way or even better then it will be very successful over the next 5 years due to many reasons. As for social part, since it's a new start up company, it might struggle about with advertisement and marketing costs to introduce this new product to the market, because of competition between other rain boot companies. However, when costumers get introduced to this product and if it qualifies for their interest and demand, then it will grow continuously at even a faster rate than it did before. The company with time might even keep on introducing better and more high-tech products that will generate better profits In the future. Talking from a general standpoint, the total average costs would decrease; resulting of less cost that will generate better revenues. Total revenue will continue to grow at the same rate, unless there is change in the price of the product, which can be determined if the company decided to enhance and innovate its products more widely. Since the products are rain boots, then there will be more demand in the winter compared to the summer, so that might effect the revenue and profits for the company depending on the season. This company has potential to grow and grow its products, so nothing can be determined yet, however if it does grow in a good environmentally sustainable way meeting its consumers demands then it will grow tremendously.