Stuart Henderson Blog 3

Part One

c.

Stu's Desk Manufacturing

A company that produces and sells mid-range desks to furniture stores.  The desks are targeted towards middle class families or small businesses, so furniture stores that market towards these groups are targeted for sales. 

Fixed Costs:

Warehouse Lease - $80,000

Equipment - $60,000

Variable Costs:

Supplies - $40

Labor - $50

Selling Price - $500

Cost Function: C (q) = 140,000 + (90q)

Revenue Function: R (q) = 500q

Profit Function: P (q) = 500q - 140,000 - 90q

BEP: 500q = 140,000 + 90q

410q = 140,000

q=341

The meaning of the break-even point is that the company is receiving as much as it is spending when it produces 341 units.

Marginal cost is the cost associated with each additional unit manufactured, essentially the difference between producing 1 and 2 units.  Marginal revenue is the revenue received from each additional sale.  In this situation, the marginal revenue slope is higher than marginal cost, but marginal cost has a higher initial value.  We see the marginal revenue function catching up to the marginal cost function until q = 341, in which they intersect.  After this point the company begins to make a profit.

The profit function shows that the company is operating at a loss until it produces its 341st unit.  At this point, the function is intersecting P(q)=0 and entering positive numbers (a profit instead of a loss).

Part 3

The company produces 200 desks per day.

Marginal cost for producing the 200th unit is $90.

Average cost = 158,000/200 = $790

1)The marginal revenue is higher than the marginal cost at q = n.  The company receives $500 for the sale but only spends $90 to produce the extra product.

2)The number of units sold daily is before the break even point.  This means that the company is operating at a loss.

3) If production is increased by one extra quantity per day, after 141 days, the company will be making a profit.

4) At q=200, an increase in production will decrease the average cost.

5) Decreasing the average cost is better for the company because average cost takes into account the fixed costs and essentially spreads out the cost among all of the production.

Part 4

1) The company will operate at a loss for the first few months, but if it continually increases production, it will begin to make a profit.

2) The company will thrive, as its marginal revenue is significantly higher than its marginal costs.  Once is passes the BEP, it will operate at a profit, which will rise quickly as more are produced.