Blog Post 3: Pewp Burgers

Part 1

Pewp Burgers is a burger joint located in Boston, MA that serves thousands of customers with its unique and delicious burgers. What makes Pewp so unique is the differen types of spices and herbs they use to season their meat. Pewp Burgers is starting to franchise its joint and is trying to inform franchise buyers with how a average franchise performs and how much money it will cost to start and run a franchise. Along with burgers, Pewp Burgers sell French fires, soda, and shakes. Our target audience is families, tourists, and those who live and work in the Boston area.  The Judge sisters started the company in 2012, after they wanted to share their love of burgers with everyone.

Part 2

 Ø  *Note* q represents quantity

 Ø  Total Fixed Costs: $13000

o   Utilities + heating a building: $900

o   Rent: $2000

o   Supplies: $6000

o   Internet/Phone: $100

o   Government fees: $1000

o   Other Start up costs: $3000

o   Costs are monthly

 Ø  Variable Costs: $3

 Ø  Price one unit is sold at: $5

 Ø  Cost Function: C(q)= 3q + 13000

 Ø  Revenue Function: R(q)= 5q

 Ø  Profit Function: P(q) = 5(q) – (3(q) +13000) = 2(q) - 13000

 Ø  Break-even point value:

o   Break-even point = Fixed costs/ (Price per unit - Variable Cost)

o   Break-even point = 13000 / (5-3) = 13000/2 = 6500 Units

 Ø  Graph of Revenue and Cost Function with depiction of Break-even point

 Ø  The break-even point on the graph is at (6500 units, $32500). This means that when Pewp Burger produces 6500 units it will reach the point where it neither makes money (a profit) nor looses money.  As seen on the graph both of the lines are linear. The slope of the revenue function shows the additional amount of money Pewp Burgers will makes for each burger sold. The slope of the cost function shows the additions cost of the creation of one burger.

 Ø  At x=6500, or when Pewp Burgers produces 6500 burgers the profit is $0 because this is the break-even point for units, it is only after this point will Pewp Burgers start making a profit, this makes sense because the definition of the break-even point is at the point where you make $0 in profits, and the y value is 0 on the profit graph.

Revenue + Cost Graph

Profit Graph

Part  3

 Ø  The number of units produced daily:

o   n= 1500, so q= 1500 units

 Ø  Marginal cost for producing the nth unit:

o   Marginal Cost (MC) = C’(q)

o   C’ (q) = (3q)’ + (13000)’

o   C’ (q)= MC = 3

o   It costs $3 to produce the nth Burger.

 Ø  Average cost of producing the nth burger

o   Average cost (AC) = Total Cost (C(q)) / Quantity (q)

o   AC = (3(1500) + 13,000) / 1500

o   AC = $11.67 – the average cost to produce 1500 burgers is $11.67

 Ø  Questions to answer:

1.     The marginal revenue is greater than the marginal cost at q=n. The marginal revenue is MC= R’(q), which equals $5 and the MC which was calculated above is equal to $3. This means that Pewp Burgers is making a profit.

2.     The number of units sold monthly is before the breakeven point. The number of burgers sold monthly is 1500, which is less than 6500, the units needed to reach the breakeven point. This means that Pewp Burger will need to produce 5000 more burgers each month if it wants to reach the breakeven point monthly.

3.      Revenue: R(q + 1) – R(q)

Ø  R(1500+1) – R(1500) = 7505-7500 = 5

Cost:  C(q+1) –C(q)

Ø  C(1500+1)- C(1500) = 17503-17500 = 3

Revenue is bigger than Cost therefore it is beneficial to produce that one more burger.

4.     Because AC>MC in my company, I will decrease the average cost if I increase production.

5.      Decreasing average cost would be beneficial for Pewp burgers because I want to spend the least amount of money producing Burgers and running my company. So I will have to make cutbacks not only on production costs that are related to actually producing the burger but other things such as utilities and other things that are needed to run my business as well. But I must also make sure that quality is not compromised while trying to decrease average costs.

Marginal Cost Graph

Average Cost Graph

Part 4

 Ø  I think my company will do fine within the next five years as long as my revenues are larger than my costs. I may have to be in debt for a little while until I pass the break-even point. I will need to pay off my initial investment costs and after that if customers keep on demanding burgers, Pewp Burgers will keep on producing. I have self-interest of making large amounts of money to make sure that customers keep coming back for Pewp Burgers. However, the key to making sure Pewp stays attractive to my customers is innovation. I will need to produce new flavors of burgers or add unique products to our menu.