All in One Manufacturing Business Analysis (Blog 3)

All in One Manufacturing was started by my father in 1987 in San Diego, California. All in One started out fairly small. Originally the business consisted of a few employees cold calling end users explaining the benefits of having promotional products from All in One. At the time the main product line consisted of pens. The service that All in One provided was to imprint or engrave the pens with either company logos or personal information. Over the years, while the service provided has changed very little, the product line has expanded incredibly. All in One now sells large amounts of technology like USB drives, tech accessories like cell phone covers and portable laptops, a series of about forty different high quality bags, and an incredibly large line of high quality writing instruments. Considering that All in One now exists within the promotional products industry, their target demographic is a large group of distributors. In this particular industry, it is not acceptable to sell directly to the end consumer, and considering that All in One is second on the supply chain, as a manufacturer, they sell to the next step (distributors).

            In 1987 the start up costs, or total fixed costs, for All in One manufacturing were about $20,000. This included renting a building, buying all of the appropriate production equipment, setting up a landline, paying employees, etc.

            The average high-end pen costs about 2 dollars to bring into inventory. The cost of engraving the pen was about 4 dollars if you factor in the small amount of labor required for a single pen as well as the energy required for the machine and other factors. All in all, the variable cost is about 6 dollars. The sale price of the pen is about 11 dollars.

The Cost function – fixed costs (a) + (variable costs (b) * quantity (q))

C (q) = a + bq

For All in One the cost function then becomes

C (q) = 20,000 + 6q

Revenue function – total revenue from selling a quantity of some good

price (p) * quantity (q)

R (q) = pq

All in One’s revenue function is

R (q) = 11q

Profit function – revenue – cost

P (q) = R(q) - C(q)

All in One’s profit function then becomes

P (q) = 11q – [20,000 + 6q] 

Break-even point, where revenue = cost

11q = 20,000 + 6q

-6q                   -6q

5q = 20,000

/5            /5

The break-even quantity is q = 4,000 pens

Cost and Revenue Function Graph

Point “b” on the graph symbolizes the break-even point

The break-even point represents the point where costs equal revenue and All in One can start making positive profits from participating in business.

Here the break-even point is where All in One sells 4,000 pens.

Marginal Cost is the incremental difference in cost between the quantity, a, and the quantity, a + 1.

Marginal Revenue is the incremental difference between revenue between the quantity, b, and the quantity, b + 1.

On the graph above, the break-even point is relatively low because the slope of the revenue function, or the marginal revenue, is significantly greater than the slope of the cost function, or marginal cost. In order for a business, like All in One, to not accumulate too many losses, you want marginal revenue to be significantly greater than marginal cost. Hence the revenue function being 11q versus the variable costs being 6q, thus allowing for a five dollar difference, or rather five dollars of profit for every unit.

                  

                                                                    Profit Graph 

The graph of the profit function shows that profits are negative before hitting the break-even point, b. Point b = (4000, 25000), or the point at which 4000 pens have been produced and 25000 dollars in costs have accumulated. The profit curve shows that once the 4001^st pen is sold, All in One goes into a period of making positive profits.
 

The quantity of pens produced daily is q = n. The average amount of pens produced daily, n, is 28,475. So, q = 28,475.

                                                                                 

Daily Production Graph 

Point d shows the amount produced daily on the revenue function, while point e shows the amount produced daily on the cost function.

Marginal Cost = C’ (q)

C (q) = 6q + 20,000

C’ (q) = 6

Meaning that the marginal cost of producing 28,475 pens in 6 dollars.

The average cost of producing the 28,475^th pen is

A (q) = C (q) / q

[6q + 20,000] / q

[6 (28,475) + 20,000] / 28,475

A (q) = 6.70 dollars

Marginal and Average Cost Functions Graph

At q = n, or q = 28,475 the marginal revenue is greater than marginal cost because All in One is making positive profits at q = n and in order to make positive profits, marginal revenue must be greater than marginal cost.

            The number of pens sold daily by All in One is after the break even point (28,475 is far greater than 4000), meaning that All in One makes positive profits daily.

             If the number of pens increases daily by one (q = n+1) so that All in One now produces 28,476 pens per day, All in One will continue to make a profit because revenue per unit is significantly higher than cost per unit.

R(q + 1) – R(q) and C(q + 1) – C(q)

11(q+1) – 11q

and

[6(q+1) + 20000] – [6q + 20000]

So that revenue equals

11(28,476) – 11(28,475)

MR at q +1 = 11

And

Cost equals

6 (28,476) – 6 (28,475)

MC at q + 1 = 6

And Profit = R(q+1) – C(q+1)

Profit = 11-6= +5 dollars

At q = 28,475, an increase in production increases average cost. This is not optimal because if average costs were to decrease, All in One’s profit margins would increase, leading to higher profits for the company.

Considering that All in One has fairly high profit margins, it seems as though the company would do quite well over the next five years, all else equal (meaning no serious natural disasters, changes in technology, changes in the economy, etc.)

You can see above that the math regarding All in One is fairly promising. The only thing that could be better is to lower average costs, therefore increasing profit margins without imposing higher costs on the consumers. However, given my understanding of the promotional products industry and our business from more than a manufacturing and accounting standpoint, I tend to question whether All in One will last. Our business is based just as much on good sales people and management as it is on good production, and frankly the former aspects are not as well organized, efficient, or profitable as the latter.