Little Auk, an indie game company

Part One and Two

History + Start-up Product:

Little Auk, a new indie game company, was founded on November 8^th, 2014. The company consists of five individuals, all currently working together to produce the first game under the company’s name: Sail Away. The developers and writers describe it as “a game that immerses you into a calm, relaxing, gorgeous environment with ambient music playing in the background.” The player engages with the environment and with the characters through the protagonist Sage. The story is still under development, but the general plot is one of a coming of age story and of a mystery. Sage has washed up on an island far away from their home, and they cannot remember where they are from exactly nor what they were doing prior. They must explore the expansive island and survive each day until they can remember who they are, where they are from, and what they were doing—all the while learning about the people and the island’s history. The company’s targets vary from age, as they believe that the game has a universal message that anyone can benefit from. Demographics will include young teenagers to adults to casual gamers to hardcore gamers.

Fixed Costs:

Item:                              Monthly Cost

Rent (utilities included)                                 $7515                                     

Internet                                                           $64.95

Payroll                                                            $16250

Business/Government Fees                            $500

Equipment                                                      $3120

Other                                                              $5000

                                                            Total: $32,449.95

Variable Costs:                                 Cost Per Game

$800 per game                                    $60 per game

Cost Function

C = cost in dollars

x = quantity 

C(x) = 800x+32,449.95

Revenue Function

R(x)  = revenue in dollars

R(x) = 60x

Profit Function

P(x) = profit in dollars

P(x) = 60x – 800x+32449.95 = -740x +32449.95

Break Even Point

60x = 800x+32449.95

0 = 740x+32449.95

-32449.95 = 740x

x = -43.85

x is approximately –44.

Interpretation

After the break-even point, Little Auk will begin to make money on the game that they developed. Unfortunately, they’ll lose money ($2000+) before they will begin to make money.  The slope of the cost function represents the additional costs of the production of the game. The slope of the revenue function represents the extra revenue made from the selling of the games.

Graph of Profit Function

The profit function graph represents the total profit each unit will produce!

The break-even point on the profit function is the opposite of the break-even point of the cost and revenue functions. This means that when Little Auk sells 44 or more games, they will start to make a profit rather than losing money. Anything above 44 games will result in money in. Anything below 44 games will result in money out—that is, losses.

Part Three  

Quantity Produced Each Day  

x = quantity

x = 100

Marginal Cost

The marginal cost of producing x = 100 units would be $800.

Average Cost

a(x) = C(q) / q = ((800*100) + 32449.95) / 100 = $1124.50

1. The marginal revenue is less than the marginal cost at q=n as the slope is not as steep—this means that the marginal revenue is not enough to cover the marginal costs that were incurred during production.
2. The number of units sold daily is after the break-even point. What should occur for Little Auk is that they are now producing a profit.
3. R(101)-R(100) = 60 

C(101)-C(100) = 80100

If the production is increased by one extra quantity, they will lose money as their costs outweigh the revenue.

4. An increase in production will increase the average cost.
5. Decreasing the average costs for the company would be better as that would actually allow Little Auk to gain more revenue from their sales. The lower the cost to produce each unit, the more profit/revenue that will result due to it.

Part Four

In order for Little Auk to succeed as a start-up project, they will have to sell more than 100 units. They will most likely have to sell thousands in order to offset their costs.  Their average cost needs to be significantly lower than their marginal cost in order for them to make profit. For the most part, finding a cheaper method to produce their games would be the best bet, as that would lower their costs and allow them to earn some profit from their games. They will most likely continue to struggle, and they’ll probably have to sign with a bigger company in order to stay afloat.