Nathalie Aissi's Blog Post #3

Part 1

The Pastel is a new company that produces high-top sneakers in any and every color, as well as any size. The one special thing about the new company and why it is doing very well in its sales, is that The Pastel sneakers are all made of animal fur, including inside of the shoe and outside of the shoe, making the sneaker very popular when it comes to its physical look, as well as the extreme comfort level of the sneaker. The company was founded in 2000 and established in Boston, Massachusetts. Since Boston is a place that is known for being quite chilly, The Pastel Company wanted to make a sneaker that people would not only wear because of its style and comfort, but also wanted to make a sneaker that can keep many Bostonians warm in their feet for long periods of time. But these sneakers will and have expanded its selling all over in the United States. So when each state begins to get cold, consumers would turn to these sneakers for warmth, comfort and style.

Part 2

Total fixed Costs:

·      Insurance: $5,000

·      Rent: $6,000

·      Property Tax: $2,000

·      Utilities: $3,000

·      Interest expense: $1,000

Total Fixed Costs: $30,000

Total Variable Costs per unit:

·      Supplies: $60

·      Direct materials: $70 for 1 square meter of animal fur

·      Labor: $30 for 3 hours of labor per sneaker

Total Variable Costs: $160

Price for which the company sells a unit: $200 for 1 unit

Cost Function: 30,000+160q

Revenue Function: R(q)=200q

Profit Function: P(q)= 200q-(30,000+160q)

Break Even Point Value:

1.    200q=30,000+160q

2.    40q=30,000

3.    q=750

4.    Answer: 750 pairs of sneakers

Cost and Revenue Function Graph

·      The break-even point on the graph (which is labeled above on the graph), is the point where the revenue and the cost are equal to one another and on the graph, this occurs when 750 pairs of sneakers are produced.  When more pairs are produced after 750 pairs, the marginal revenue is surpassing the marginal cost. Since the marginal revenue line continues to get steeper, it gets steeper than the marginal cost line. This means that after the break-even point on the graph, the revenue is increasing more than the cost.

Profit Function Graph

·      The break-even point on this graph is the little black dot on the horizontal axis and that dot is the value of when no profit is made (zero profits). This means that any quantity below 750 pairs of sneakers will result in a loss of money and any quantity above 750 pairs of sneakers will result in a profit. For example, when the quantity is 750 pairs of sneakers and more, the graph is positive and will be above the horizontal axis. But if the quantity is below 750, the graph is negative and below the horizontal axis. This means that the profit function shows the value at where a specific production quantity will begin making a profit.

Q=60 (Units produced daily)

·      Marginal Cost of producing the nth unit: 160 dollars

            Marginal cost=derivative of the cost function: c’(q)

·      Average cost of producing the nth unit: 660 dollars

Average cost= cost function/total quantity

  

Marginal and Average Cost graph

1.    At q=60, Marginal revenue is greater than marginal cost because marginal revenue at q=60 is $12,000 and marginal cost at q=60 is $160, which means that the revenue is exceeding the cost, meaning that the company is making positive profits.

2.    The number of units sold daily is 60 pairs of sneakers, which is before the break-even point of 750, which means the company will start operating at a loss but eventually, will make a profit when the break-even point is reached.

3.    Yes because for every extra quantity produced per day, the marginal revenue is $12,000 and the marginal cost is $160. So for every extra unit produced, the company will continue to make more money.

4.    The increase in production will lead to a decrease to the average cost because of the fact that average cost is greater than the marginal cost.

5.    Decreasing average costs will be better for the company because it will maximize the company’s profit. If the average cost was increasing, then the company’s profit would begin to decline. It’s an inverse relationship.

1.&2. From all the calculations I have made, my company will be successful over the next five years. When it comes to advertising the product, it may be a struggle and the costs of marketing the product may be a struggle as well because this is a new company and it is competing with other very popular sneaker company’s like Nike. But as soon as the company’s name is more out there as time goes by and the consumers are introduced with the new sneaker company, the demand for this sneaker will increase continuously. Also, as a new company, we will have time to come up with more unique ideas for the shoe that will attract consumer’s attention and this will increase profits that the company will earn. So since the average costs will decrease, which will increase revenue and help the company earn a higher profit. The marginal revenue should continue to flourish unless the product’s price does end up changing over time. Since the company’s product are sneakers, they will always be wanted during the spring, summer, winter or fall. But with it’s unique fur inside and out of the sneaker, it would be demanded more during fall and winter for the fact that it will be cold and these shoes will keep consumer’s feet very warm during that period of time. All in all, this company has great potential of growing.