Lindsay Wang- Blog 3

            I will be analyzing InTransit, a concept that I had worked on in a previous class. InTransit is a food delivery service to airport terminals. This service provides customers with access to higher quality food then what would be traditionally offered in an airport terminal. This service also allows customers to taste local cuisine during a lay over. The company is driven by the large amount of passengers that pass through an airport terminal on a daily basis.

            The target market of InTransit is frequent fliers and foreign passengers. Frequent fliers and the establishment of corporate accounts is key for building a constant customer base. Foreign passengers will be key because; they will want a taste of local cuisine. 

Part 2

The following table summarizes the business start up costs.

Rent Deposits	$30,000
Leasehold Improvements	$100,000
Equipment	$5,000
Vehicles	$54,000
Advertising and Promotion	$240,000
Working Capital	$200,000
Total Required Funds	$629,000

            In order to deliver food to customers it will cost InTransit $17/unit. This is averaged based on the prices of meals that we look to provide customers. Costs in delivering a meal include: labor, gas, paying vendors, rent etc.

            InTransit provides its customers with meals for an average price of $25. This yields the following revenue function:

R(q)=$25q

            Combining the cost per unit and the start up costs, we get that the cost function as the following:

C(q)=$629,000+$17q

            Combining the revenue and cost functions gives the following profit function:

P(q)=R(q)-C(q)=$25q-($629,000+$17q)=$8q-$629,000

            The break-even point is found to be 78,625 units.

                             0=$8q-629,000

                             q=$629,000/8=78,625 units

The following chart summarizes the above equations.

 

         

The above graph shows the revenue and cost as functions of units sold. Based on these graphs the marginal cost is constant at $17 per unit, and the marginal revenue is constant at $25 per unit. At the intersections of these two graphs, is the break-even point at which revenue exceeds costs. This is the number of units that must be sold in order to turn a profit.

         The above graph shows the profit as a function of units sold. The break-even point is found to occur at 78,625 units sold. At this point the revenue generated is equal to the costs. This means that fixed and marginal costs are covered by revenue. At this point the company begins to generate a profit, corresponding to a positive y-value on the graph.

Part 3

            Based upon the financials generated, there are 219 units sold on a daily basis.

            The figure above shows daily revenue and cost. The daily revenue is $5,475 and the daily cost is $3,723 when selling 219 units. The marginal cost of producing a 220^th unit is found to be $204. The following equation was used in this analysis.

($3927-$3723)/(220-219)=$204/unit

            The average cost of producing 219 units was found to be 17$ per unit, based on the following equation.

                                     ($3723-$0)/(219-0)=$17/unit

           

          

  The following figure plots the slopes of the average cost and marginal cost versus the number of units sold.

            At n=219, the marginal revenue is greater than the marginal cost. The marginal revenue is constantly $25/unit while the marginal cost at n=219 is $17/unit. The number of units sold daily is beyond the break-even point, meaning that there is a daily profit generated. Increasing the number of units sold will not affect revenue because R (q+1)=R (q). On the other hand C (q+1)>C (q). At this point a profit is still generated, however the profit margin decreases because of the increased marginal cost.  Decreasing the average cost will be better for the company because, lower costs will lead to increased profit.

Part 4

            Over the next 5 years InTransit has the potential to maintain profitability. The biggest challenge for the firm will be scaling and keeping costs low. Mathematically as a stand alone business the firm will be profitable as long as daily sales remain in the region of 219 units per day. The challenge for the company will be maintaining profit margin as it scales. Ideally with growth the company will lower costs, which will increase profits. The company will also need to capture market share from other food vendors found in airports. The biggest challenges for InTransit over the next five years will be scaling appropriately and maintaining its profit margin.