Shelby's Shell Shop

Shelby's Shell Shop sells sea shells found along the ocean shore. Most of the shells along the shore are not very desirable in the state that they are found, so Shelby uses arts and crafts techniques to make them into beautiful jewelry by hand. She learned this technique from her grandmother and has been making them into necklaces since she was a child. She opened her sea shell shop two years ago and has done well. Her success thrives on her ability to target her product well to travelers looking unique pieces. This target audience includes traveling women ages 18-34 for the most part. On to the financials:

Start-Up Costs (Fixed Costs):

Item	Cost
Rent	$600
Utilities	$100
Supplies	$700
Total	$1400

Variable Costs:

Item	Cost
Labor	$12
Raw Materials	$6
Total	$18/Unit

Price: Shelby sells her custom sea shell necklaces for $28.00

Cost Function: C(q)=1400+18q

Revenue Function: R(q)=28q

Profit Function: P(q)=(28q)-(1400+18q)

Break Even Point:

1400+18q=28q

1400=10q

1400/10=10q/10

140=q

At a quantity of 140 units, the amount of revenue is equal to the cost of production. At any production amount after that, the company produces a profit. Revenue=Blue Cost=Red

The slope of the revenue function is greater than that of the cost function. The cost function has a slope of 18 and the revenue function has a slope of 28. That means the marginal cost is less than the marginal revenue. After the breakeven point of 140 units the company produces a profit.

Graph of the Profit Function:

After 140 units, the company produces a profit.

Production: Shelby is industrious and can produce 200 units a day. Q=200

Marginal Cost: M(c)=18(200)=3600

Average Cost: (3600+1400)/200= 25

1)Marginal revenue is greater than marginal cost at q=200 as it is past the breakeven point and the slope is greater than that of the marginal cost.

2)The number of units sold is after the breakeven point and thus the company is making a profit.

3) Yes the company will continue to make money as you increase the quantity because the marginal cost of production at 201 is still lower than the marginal revenue at 201.

4) It decreases the average cost of the company to increase production.

5)Decreasing average costs at higher production is good for the company because it means that the greater quantity they produce the more they disperse the fixed costs over the increased quantity.

The company will thrive over the next five years should Shelby be able to produce at quantities that are greater than 140 units. If she can produce more than her current output of 200 units, the company will be even more profitable.  If she can scale production without incurring excess costs, her profit margin will grow.