Lauren Trombetta

Blog Assignment Three

3/29/15

Blog Assignment Three

Part One

·      Kim’s Cottage Confection

o   Product: Wedding cakes

Part Two

·      One of my first jobs was at a local bakery back home. The shop was called “Kim’s Cottage Confections. It’s primarily a wedding cake shop, however, she sells baked goods up front. Every weekend she makes cakes for weddings and has consultations with brides to be. Additionally, around each holiday she markets goods orientated to it. She makes Italian cookie platters around Christmas and black and orange treats around Halloween. The store is a small business as it’s not owned by a chain or run by larger management.  Kim started the store in the early 2000’s when she quit her other job. She has two types of customers. She caters to walk in customers who want a quick fudge square or cupcake, and then to her catering clients. She makes baked goods for weddings, birthday party’s and large gatherings.

·      Fixed Costs

o   Rent Building:

§  500 a month

o   Electricity

§  50 a month

o   Property Taxes

§  50 a month

o   Internet

§  75 a month

o   Heat and cooling

§  100 a month

o   Supplies

§  500 a month

·      Variable Costs

o   Labor

§  100 per tier of cake

o   Ingredients

§  20 per tier of cake

·      Price per Unit

o   250 per tier of cake

·      Cost function

o   C(q)=120x+1225

·      Revenue Function

o   P(q)=200x

·      Profit Function

o   P(q)= 200x-120x-1225

·      Break Even

o   200x=120x+1225

o   80x=1225

o   x=15.3

o   x=16 tiers to break even on wedding cakes

·      The break-even point is the point at which the cost function intercepts with the profit function. Above the break even point is profit and below it is loss. Additionally, the marginal revenue is higher than the marginal loss per unit because the slope of marginal revenue is greater than that of marginal cost.

·      The profit function graph shows at which production level of units will yield a profit or loss

Part Three

·      Kim makes on average 15 cakes a month with the cakes having an average of 2 tiers per cake.

o   Therefore Kim produces on average 30 tiers of cake a month

·      Marginal Cost=derivative of cost function

o   Cost Function=120x+1225

o   Derivative=120 per tier

o   Marginal Cost=120 per tier

·      Average Cost

o   C(q)/q

§  (120(30)+1225)/(30)

§  Average Cost=160.83

·      The marginal revue is higher than the marginal cost at q=30 because the derivate of the revenue function is 200 and the derivative of the cost function is 120. Therefore Kim will have profit on the next tier of cake sold.

·      The number of units sold per month is after the break even point meaning that the company should be making a profit

·      Yes the company will continue to make a profit

o   R(q + 1) – R(q) and C(q + 1) – C(q)

§  R(31)-R(30)

·      6200-6000

·      200 in revenue

§  C(q + 1) – C(q)

·      C(q)=120x+1225

·      4945-4825

o   120 Cost

§  At the 31 unit there will be a 80 profit

·      At  30 units an increase in production decreases the average cost of the company. A company wants a decreasing average cost to make more money per unit.

Part Four

·      I believe the company will continue to make a profit in the next five years. As long as Kim can maintain her contracts with local venues where she provides the wedding cakes for weddings then she will make a profit. The other treats she sells often go stale before she can sell them but they have a much lower marginal revenue and cost than the wedding cakes do. And, subsequently, the profit is very minimal on the small treats. Therefore, if she continues to sell wedding cakes, where she makes the most money, and continues to sell cakes with more than 16 tiers total then she will continue to make a profit. The economy is on the rise so people may be willing to buy a more expensive, extravagant, bigger cake. However, people will still continue to get married no matter the economic situations so cakes will always be in some type of demand. Additionally, as long as she remains the only competitor in town she will continue to have a stronghold on the market. She does not have a monopoly, though. When couples book a venue they give them the choice of two bakeries to purchase their cake from and Kim’s is on of them so there is competition in gaining customers.