Blog Post 3 - Patricio Barnuevo

Part 1
Spotluck is a new startup out of Bethesda, Maryland that helps connect local restaurants connect with customers looking for quality local eats. Spotluck is a mobile app that allows consumers to discover local restaurants and save money in a fun new way, through spins that point people in the direction of new local restaurants. The Spotluck app is free for people to download, but restaurants that sign up to be part of the Spotluck community pay a small fee for every customer that the app attracts to the restaurant. The company was started in 2013 and although they're only setup in DC, they have over 100 restaurants signed up. Spotluck mainly targets young DC citizens that have a larger disposable income, this is because they will be the most ideal customer at these restaurants (they will spend the most and return often).  Spotluck is on it's way to becoming the next big tech startup. 


Part 2
Fixed Costs (per month):
·      Advertising/Marketing Supplies: $1,250·      Rent: $4,250 (rent out common office space, therefore includes taxes and utilities)·      Staff: $19,500

·      Tech R&D: $1,100
TOTAL Fixed Costs - > $26,100

Variable Costs per unit*: 
·      App hosting: ~ $0.50
TOTAL Variable Costs - > $0.50

*there aren't any true variable costs with mobile applications, however the Spotluck team helped me estimate this number per app download 

Price:
The application is free, however the company makes $2.50 per app usage at a restaurant

Cost Function:
C(q) = 26,000 + .5q 

Revenue Function:
R(q )= 2.5q

Profit Function:
P(q) = 2.5q - (26,000 + .5q)

Break Even Point Value:
2.5q = 26,000 + .5q 
2q = 26,000
q = 13,000
After 13,000 uses of the app, the company will begin to make profits. 

Cost and Revenue Function Graph:

Red = Cost Function

Blue = Revenue Function

Break even point is 13,000

The breakeven point represents the point in which revenue and costs are equal, after this point profits can begin to be made. In terms of Spotluck, the breakeven point is at 13,000 uses and therefore will begin to make profits after that point. The cost function has a slower slope, or marginal cost, than the revenue function. However, because of fixed costs, the cost function begins higher on the y-axis and therefore there is a period of time in which profits aren't made despite marginal revenue being larger than marginal cost. 

Profit Function Graph: 

Red = Profit Function

Break even point is 13,000

The breakeven point on the profit function graph is the point in which the line passes the x axis, on this graph that point is at 13,000. The profit function graph essentially combines the cost and revenue graphs to create a single graph for people to understand the amount of money (profits) that a company can make at different quantities (downloads). 

Part 3

The Spotluck app sees about 300 uses a day, therefore it can be said that it produces 300 units a day. On a normal month, the app is used about 9,300 times a month.  Therefore q = 9,300

Red = Cost Function

Blue = Revenue Function

Black = Current Production level (9,300)

Marginal Cost:

C'(q) = .5

Average Cost:

26,000 + .5(9,300) / 9,300 = 3.29

Average cost per unit is $3.29 at 9,300 units

Red= Marginal cost (.5)

Blue = Average cost (3.29)

1)

The marginal revenue ($2.5) is larger than the marginal cost ($0.5). I figured this out by figuring out the marginal cost/revenue based of the respective functions

2)

The amount of units produced (9,300) currently is below the break even point (13,000). That indicates that this company is currently not making a profit. 

3)

Even if the company increased "quantity" by one unit per day, it would not breakeven or make a profit because increasing by one will not increase revenue by enough to match cost. 

o   R(q + 1) – R(q) and C(q + 1) – C(q)§  R(9301)-R(9300)·      23,252.5-23,250
·      2.5 in revenue
§  C(q + 1) – C(q)·      (26,000 + .5(9301)) - (26,000 + .5(9300))
·      30,650.5-30,650
o   .5 in cost

4)
At q=n, an increase in production will decrease average cost because it will lessen the effects of the initial fixed costs on the overall production costs.

5)
When average costs increase, it cuts into revenue and therefore reduces profits. Therefore it is always best for a company to decrease average costs.

Part 4

1/2)
Although Spotluck is currently struggling to create profits, I believe their excited new app combined with their innovative marketing efforts will lead to the company to continue to grow to the point in which it become profitable. Spot Luck has grown tremendously in the past couple of years, and every day it is reaching new customers. In the next five years, the company will probably have expanded beyond just offering their services in DC and therefore have grown enough to reach the user volume to pass the break even point. What makes the company so desirable is that an offers a free service that is very attractive to a young professional, an individual who has disposable income to use at restaurants and who is still curious to explore new areas of cities.