Muneera Albahar blog post 3

Part 1

Hypothetical Company’s Scenario

EXCHARGE Inc is a startup company located in McLean, Virginia that produces electrical car battery for various car manufacturer such as Tesla, BMW, Ford, etc. The start-up cost for getting the fabrication lab ready to produce car batteries is $500,000 and the cost for producing one unit (battery) is $350/unit. Additionally, EXCHARGE sells each unit to car manufacturer for $450 each.

Part 2

a.     The total Fixed cost is $500,000 includes:

1)      Five year Manufacturing Plant Rent -- $200,000

2)      Supplies such as manufacturing machine -- $200,000

3)      Operating cost including initial marketing expense, management expense, electric cost and other costs -- $100,000

b.     Variable cost is$350, mostly comprised of raw materials, packaging, and production incentive.

c.     The selling price for each unit is $450.

1.     Given the fixed cost, variable cost and selling price, we now have the following function:

Let q be the number of batteries that produced and sold.

Cost Function:       $500,000 + $350q

Revenue Function:    $450q

Profit Function:      ($450-$350)q - $500,000= $100q - $500,000

2.     The break-even point value is the value of quantities that make the profit equal to zero. So we make the following equation:

$100q - $500,000 = $0

   Solve q= 5,000 units

3.     In Graph 1, the red line is the graph of the cost function and the blue line is the graph of the revenue function. The break-even point has the x axis value of 5000 and y axis value of 2.25 million dollars.

			Graph 1
	Dollar Amount

 

No.of Units

Break-even point

  

The break-even point indicates the point at which cost or expenses and revenue are equal. In this case, if the company produces and sells 5000 batteries, the revenue will be equal to its cost. If the company sells more than 5000 batteries; it will start to make a profit.

The slope of revenue is 450, which means the marginal revenue is $450. Marginal revenue at each level of production is the additional revenue brought by producing the next unit.

The slope of cost is $350, which means the marginal cost is $350. Marginal cost at each level of production is the additional costs required to produce the next unit

Since marginal revenue is larger than the marginal cost, the increase in revenue will exceed the increase in costs when the units increase.

4.     Graph 2 shows you the graph of the profit function (blue line). The line shows you the relationship between units produced/sold and the profit eanred. The breakeven point is the point which makes the profit equal to zero, so it has the x axis value of 5000 and y axis value of 0.

You can see from the graph, the more units produced, the larger the profit. when the units is less than 5000, the profit is negative while when the units exceeds 5000, the profit is positive.

			Graph 2
	Dollar Amount

 

No.of Units

Break-even point

Part 3

a.     Suppose EXCHARGE sold 100 electrical car batteries per day.

b.     Graph 3 shows you the point of the number of units produced daily on the cost and revenue graphs.

When units=100, the revenue is 450*100=$45000 and the cost is 500,000 + 100*350=$535,000

			Graph 3
	Dollar Amount

 

No.of Units

c.     If the company produces 101 units per day, than the cost will become:

$500,000 + $350*101= $535350

Compare to the 100 units production level, the cost increases by

$535350-$535,000= $350.

The marginal cost = $350/1 = $350

d.     The average cost for producing 100 units is:

(500,000 + 100*350)/100=$5350

e.     The following graph shows you the marginal cost ($350) and the average cost ($5350) for the company when the units sold is 100.

 

The answers for the questions:

(1)  The marginal revenue is greater than the marginal cost at q=100.

(2)  The number of units sold daily is before the break-even point, which means the company currently does not make profit and they bear the loss.

(3)  If the production is increased by one extra quantity per day, the new revenue will be $45450 and the new cost will be $535350.

R(101)-R(100)= $450

C(101)-C(100)=$350

  Since the increase in revenue is larger than the increase in cost, the company will continue to make money if they produce additional one unit.

(4)  When q=100 units, the average cost for the company is $5350.

If the company increase its production to 101 units, the average cost will become:

(500,000 + 101*350)/101=$5300, which is less than $5350.

Thus, an increase of production will decrease the average cost for the company.

(5)  Of course, a decreasing average costs would be better for the company because it means that the company can save its average producing cost by producing more units.

Part 4

1.     For the next five years, the company will try to increase its production. Once the units produced and sold, the company will start to make a profit. For each unit produced, the company will earn $100 profit based on our simplified assumption. However, in reality, the variable cost is never constant. It will keep in a low level at first and then start to increase when the units produced exceeds a certain level. The ideal producing level is the point that marginal revenue equals the marginal cost.

The goal for the company in the next five years includes the following:

(1)  reduce its producing cost,

(2)  control product’s quality

(3)  increase its sales

(4)  maintain its price competitiveness

(5)  Invest money in research and technology development to beat the competitors

2.     In our opinion, our hypothetical company will thrive in the future for the following reasons:

(1)  The increase in sales of electrical cars is substantial in the recent five years. More and more people concern about the environment problems. And the cost of buying electrical car will be lower than the normal car in the long run, especially considering the lack of petroleum

(2)  This is a burgeoning market, if the company can produce good quality product and accomplish a successful marketing, it will become a market leader, which will give it the price advantage and cost advantage.

(3)  According to our calculation, it takes the company about 2 month to cover its cost, which is acceptable. After first two months, the company will start to make profit. The profit for producing one battery is $100, which is quite high.