Mohamed Salahuddin Blog 3

Flash Food Delivery Company

Marginal analysis

Flash Food Delivery Company is a startup company. We offer a list of restaurants for customer to choose their menu and dishes, either through online webpage or phone call, so they can find what they want and eat without going out of their home.

Working with a large number of neighborhood favorites restaurants, we simplify the art of food delivery. Whether it’s a family dinner, office event or holiday gift, Flash Food Delivery Company is there with a solution to all the food delivery needs.

We can continually give back time to busy people with this restaurant delivery service. From our food delivery website, you can order food from many restaurants online in Saudi Arabia. One of the advantages is that you can deliver from a restaurant that doesn’t have delivery services such as Chili's, Olive Gardens, and Fridays.  It makes a bridge between the restaurants and the customers so it will help both of them.

For restaurants it will make an advantage because even if someone doesn't know the restaurant he can go and check the menu online and order food from that restaurant.

For customer, it not only can provide a number of menus with various kinds of food to choose, but also save the precious time to go there. Not to mention the time to wait for the food and service, the limited choices of foods in a single restaurant, and the dinning environment that you might not as like as your own dining room.

Our mission is to become the single bridge of the customer to all restaurants and favorite places they would like to order from.

Market Analysis

The company will starts in Saudi Arabia. We will start in major cities in Saudi Arabia, such as Khobar, Jeddah, and Riyadh. There is variety of restaurants in these cities. The GDP per capita in terms of purchasing power is $25,700[1]. There are 90% population are Arabic, with 100% Muslim. We believe the food delivery service has large potential to grow, especially for female customers.

Saudi Arabia acceded to the WTO in December 2005 after many years of negotiation. Five years of high oil prices during 2004-08 gave the Kingdom ample financial reserves to manage the impact of the global financial crisis. In year 2009, falling oil prices, and the global economic slowdown reduced Saudi economic growth, prompting the postponement of some economic development projects. Saudi Arabia is encouraging the growth of the private sector in order to diversify its economy and to employ more Saudi nationals. This would be encouraging for startup companies like Flash Food Delivery Company.

Cost Structure Analysis

 Fixed Costs

Total Fixed Costs:

Legal and Accounting fees	$12,100
Utilities	$7,260
Insurance	$12,100
Rent	$58,080
Depreciation	$20,420
Salaries and Benefits	$423,500
Total Fixed Costs	$533,460

Variable Costs:

     Cost of Goods Sold = 30*Q

Revenue function:

 R (Q) = 40*Q

Profit function:

 P (Q) = R-VC-FC=10*Q -533460

Break-even point:

 BEQ = 533460/10 =53346 units

When output is zero, the profit is a net loss of $533460, which is the same as the fixed cost on the y-intercept;

When output is 53346, the firm is break-even with profit zero, which is shown in the graph.

Daily Marginal Analysis

Daily expected Quantity = 180000/360 = 500 units

Marginal revenue = 40;

Marginal cost = 30;

Since the fixed cost will not change as the volume change, we will use the annual number averaging in daily basis for analysis purpose.

AC =TC/Q = (533460+30Q)/Q = 533460/Q +30

Daily AC = 533460/360/Q+30 = 1482/Q +30

AC curve is declining as Q increases, and it is approaching MC as Q increases

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

Marginal Revenue is higher than marginal cost, since Marginal revenue = 40; Marginal cost = 30; they are constant.

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 = 500 which is higher than the daily break-even point of 148 units

This means we expect to have positive profit.

3)    If production is increased by one extra quantity per day (i.e. if q = n + 1)) will the company continue to make money? Explain. (be sure to reference the formulas R(q + 1) – R(q) and C(q + 1) – C(q) in your explanation)

Yes, since Marginal Revenue is higher than marginal cost, the additional profit is the difference which is 40-30 = $10 per extra quantity per day.

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

Increase of production will decrease the average cost, because the same fixed costs been shared by more units, making each unit costs less.

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

Decreasing average costs would be better for the company, since the higher the production, the lower average costs, and the higher than profit.

Forecast and Conclusion

We believe the company will do well in the next five years. With the rapid growth in internet usages, we believe our company has a good opportunity to thrive with it. We also plan to expand our services to other places and countries in the Middle East region, conditional on the success of our main service center in Saudi Arabia. We believe there are many places in the region offering good opportunities, with a young and thriving population, with rapid economic growth and high living standards. For example, we consider expanding into Dubai, UAE and Qatar, Omen.

Based on out projection, we will be able to achieve 10% growth rate for the next five years. The projected revenue, cost and profit are in the exhibit below. We are optimistic on the growth rate as the world economy continue its recovery.

Flash Food Delivery Company
Projected Income Statement
For 2015 -2019
	2015	2016	2017	2018	2019
Sales	$7,200,000	$7,920,000	$8,712,000	$9,583,200	$10,541,520
Cost of Goods Sold	$5,400,000	$5,940,000	$6,534,000	$7,187,400	$7,906,140
Contribution Margin	$1,800,000	$1,980,000	$2,178,000	$2,395,800	$2,635,380
Fixed Costs
Legal and Accounting fees	$12,100	$13,310	$14,641	$16,105	$17,716
Utilities	$7,260	$7,986	$8,785	$9,663	$10,629
Insurance	$12,100	$13,310	$14,641	$16,105	$17,716
Rent	$58,080	$63,888	$70,277	$77,304	$85,035
Depreciation	$20,420	$22,462	$24,708	$27,179	$29,897
Salaries and Benefits	$423,500	$465,850	$512,435	$563,679	$620,046
Total Fixed Costs	$533,460	$586,806	$645,487	$710,035	$781,039
Net Income	$1,266,540	$1,393,194	$1,532,513	$1,685,765	$1,854,341