14/04/2023

1

Consulting ProjectIB501 Managerial Economics Group Project GROUP 2

14/04/2023

2

Table of Contents1. Consulting Case Presentation

2. Potential Market Demand Analysis

3. Cost Model

4. Pricing Model

5. Own-Price Elasticity of Demand

6. Consulting Case Conclusion

14/04/2023

3

Consulting Case Introduction

Opening a Cram School in Kaohsiung

14/04/2023

4

Demand Estimating for opening a Cram School

What’s a Cram School ? TOEFL, GRE and GMAT

Who are the Competitors? Commercial Language School Test Preparation School Exclusion

What has to be done? Demand for the product Pricing & Cost Models Own-Price Elasticity of the Demand

14/04/2023

5

Competitors Pricing Models15 competitors in total

Global Village: NTD 20,000 per 52 hours program

Wall Street Instiute: NTD 80,000 per year (shut down)

Study Link: NTD15,000 per 52 hours program

Taipei Language Institute: NTD 10,000 per 52 hours

Average Market Price: NTD 15,000

14/04/2023

6

Potential Market Demand Analysis

Opening a Cram School in Kaohsiung

14/04/2023

7

Identifying Key Segments

Total Demand

Students 18 – 25 y.o. Adults 25 – 30 y.o.

14/04/2023

8

Market Demand for Students 1/2

Cram School Total Revenues in Taiwan: NTD 40 Billions

Cram School Total Revenues in Kaohsiung: NTD 3,5 Billions

10% Students Cram School: NTD 350 Millions

NTD 200 Millions for Tests Preparation only

Average price: NTD 15,000 Q = TR / P Q = 13,300 students

14/04/2023

9

Market Demand for Students 2/2

Total Students13900

0

Compulsory Test 69500

Final year students 13900

1/3 Students

5 years-program

14/04/2023

10

2nd Targeted Segments: Adults

Location Taiwan KaohsiungTotal Population 23000000 150000025-30 years old population 1906000 124304

As a % of total population 8,29% 8,29%Total Workforce 11200000 730435As a % of total population 49% 49%Services Industry 5600000 365217As a % of total population 50% 50%

Regarding 25 - 30 years old 464070 30265

1/5 English test 232035 6053

14/04/2023

11

Aggregate Market Demand

Demand Analysis

Students (18-25 years old) 13900

Adults 6053

Total 19953

Potential LR Demand

# of Cram Schools 30

Total Demand 20000

Demand per School 667

If we compete in price, we can catch up to 667 students per year in the long run opening a Cram School.

14/04/2023

12

Cost ModelDetermining Variable and Fixed Cost

14/04/2023

13

Variable VS Fixed Costs

Variable Costs

Daily FurnituresBooksCD playersCDsPhotocopiesOffice furnitureTablesChairsEmployeesTeachersSecretary/TAAdvertisingNewspaper

Fixed Costs

Office Building

Computer

Provision

Website

14/04/2023

14

Pricing ModelBased on Cost Model Determination

14/04/2023

151st Year: Start-up Short Run

COST MODEL 1

Year 1 Customers 100

Variable Costs Fixed Costs

Object Unit Price Quantity Total Object Unit Price Quantity TotalDaily Furnitures Office Building 90000 200 18000000Books 800 100 80000 Computer 12000 1 12000CD players 8000 1 8000 Provision 5000CDs 4000 3 12000 Website 40000 1 40000Photocopies 1 10400 10400 Total Fixed Costs 18057000

Sub-Total 1 110400 FC paid Year 1 0% 0Office furniture SR Break Even Point 12128 100 1212750Tables 300 7 2100 Revenues 12520 100 1252000Chairs 50 45 2250 Profits Y1 39250

Sub-Total 2 4350 Employees Teacher 1 650 936 608400 Secretary/TA 200 1248 249600

Sub-Total 3 858000 Advertising Newspaper 20000 12 240000

Sub-Total 4 240000 Total Variable Costs 1212750

14/04/2023

162nd Year: Long Run starts

COST MODEL 2Year 2

Customers 200

Variable Costs Fixed Costs

Object Unit Price Quantity Total Object Unit Price Quantity TotalDaily Furnitures Office Building 90000 200 18000000Books 800 200 160000 Computer 12000 1 12000CD players 8000 0 0 Provision 5000CDs 4000 0 0 Website 40000 1 40000Photocopies 1 20800 20800 Total Fixed Costs 18057000

Sub-Total 1 180800 FC paid Year 2 5% 902850Office furniture SR Break Even Point 12516,25 200 2503250Tables 300 0 0 Revenues 12520 200 2504000Chairs 50 0 0 Profits Y2 750

Sub-Total 2 0 Employees Teacher 1 750 1560 1170000 Secretary/TA 200 1248 249600

Sub-Total 3 1419600 Total Variable Costs 1600400

14/04/2023

173rd Year: 1 more teacher

COST MODEL 3

Year 3 Customers 300

Variable Costs Fixed Costs

Object Unit Price Quantity Total Object Unit Price Quantity Total

Daily Furnitures Office Building 90000 200 18000000Books 800 300 240000 Computer 12000 1 12000CD players 8000 1 8000 Provision 5000CDs 4000 3 12000 Website 40000 1 40000Photocopies 1 31200 31200 Total Fixed Costs 18057000

Sub-Total 1 291200 FC paid Year 3 10% 1805700Office furniture SR Break Even Point 13216 300 3964750Tables 300 5 1500 Revenues 14500 300 4350000Chairs 50 43 2150 Profits Y2 385250

Sub-Total 2 3650 Employees Teacher 1 750 1560 1170000 Teacher 2 650 684 444600 Secretary/TA 200 1248 249600

Sub-Total 3 1864200 Total Variable Costs 2159050

14/04/2023

184th year: Keep going on

COST MODEL 4

Year 4 Customers 400

Variable Costs Fixed Costs

Object Unit Price Quantity Total Object Unit Price Quantity Total

Daily Furnitures Office Building 90000 200 18000000Books 800 400 320000 Computer 12000 1 12000CD players 8000 0 0 Provision 5000CDs 4000 0 0 Website 40000 1 40000Photocopies 1 41600 41600 Total Fixed Costs 18057000

Sub-Total 1 361600 FC paid Year 4 16% 2889120Office furniture SR Break Even Point 14231 400 5692240Tables 300 0 0 Revenues 14500 400 5800000Chairs 50 0 0 Profits Y4 107760

Sub-Total 2 0 Employees Teacher 1 750 1560 1170000 Teacher 2 750 1296 972000 Secretary/TA 200 1498 299520

Sub-Total 3 2441520 Total Variable Costs 2803120

14/04/2023

19

5th year: closer to market demand

COST MODEL 5

Year 5 Customers 500

Variable Costs Fixed Costs

Object Unit Price Quantity Total Object Unit Price Quantity TotalDaily Furnitures Office Building 90000 200 18000000Books 800 500 400000 Computer 12000 1 12000CD players 8000 0 0 Provision 5000CDs 4000 0 0 Website 40000 1 40000Photocopies 1 52000 52000 Total Fixed Costs 18057000

Sub-Total 1 452000 FC paid Year 5 21% 3791970Office furniture SR Break Even Point 14397 500 3964750Tables 300 0 0 Revenues 14500 500 4350000Chairs 50 0 0 Profits Y5 385250

Sub-Total 2 0 Employees Teacher 1 750 1800 1350000 Teacher 2 750 1740 1305000 Secretary/TA 200 1498 299520

Sub-Total 3 2954520 Total Variable Costs 3406520

14/04/2023

206th year: The third teacher

COST MODEL 6Year 6

Customers 600Variable Costs Fixed Costs

Object Unit Price Quantity Total Object Unit Price Quantity TotalDaily Furnitures Office Building 90000 200 18000000Books 800 600 480000 Computer 12000 1 12000CD players 8000 1 8000 Provision 5000CDs 4000 3 12000 Website 40000 1 40000Photocopies 1 62400 62400 Total Fixed Costs 18057000

Sub-Total 1 562400FC paid Year 6 26% 4694820Office furniture SR Break Even Point 14350 600 8610190Tables 300 5 1500 Revenues 14500 600 8700000Chairs 50 43 2150 Profits Y6 89810

Sub-Total 2 3650 Employees Teacher 1 750 1560 1170000 Teacher 2 750 1560 1170000 Teacher 3 650 1092 709800 Secretary/TA 200 1498 299520

Sub-Total 3 3349320 Total Variable Costs 3915370

14/04/2023

21

7th year: No more fixed costs !

COST MODEL 7

Year 7 Customers 600

Variable Costs Fixed CostsObject Unit Price Quantity Total Object Unit Price Quantity TotalDaily Furnitures Office Building 90000 200 18000000Books 800 600 480000 Computer 12000 1 12000CD players 8000 0 0 Provision 5000CDs 4000 0 0 Website 40000 1 40000Photocopies 1 62400 62400 Total Fixed Costs 18057000

Sub-Total 1 542400 FC paid Year 7 22% 3972540Office furniture SR Break Even Point 13107 600 7864260Tables 300 0 0 Revenues 14500 600 8700000Chairs 50 0 0 Profits Y7 835740

Sub-Total 2 0 Employees Teacher 1 750 1560 1170000 Teacher 2 750 1560 1170000 Teacher 3 650 1092 709800 Secretary/TA 200 1498 299520

Sub-Total 3 3349320 Total Variable Costs 3891720

14/04/2023

22

year 1 year 2 year 3 year 4 year 5 year 6 year 710,000

11,000

12,000

13,000

14,000

15,000

break even pointprice we actually charge

Pricing Model OverviewYear # Customers Break-Even Point Price Total Fixed Costs Profits

1 100 12128 12520 0% 392502 200 12516 12520 5% 7503 300 13216 14500 15% 3852504 400 14231 14500 31% 1077605 500 14397 14500 52% 3852506 600 14350 14500 78% 898107 600 13107 14500 100% 835740

Aggregate Profits Year 7 1 843 810

14/04/2023

23

Own-Price Elasticity of the

DemandHow should we charge customers according to

their price sensitivity?

14/04/2023

24

Reputation makes the demand more inelastic

14/04/2023

25

Consulting Case Conclusion

Our Client should open a Cram School in Kaohsiung

14/04/2023

26

Conclusion: GO

Potential long-run aggregate demand: 600 customers

Pricing: NTD 14,500

After 5th year: meet market demand

7th year aggregate profits: NTD 1,8 million

From the 8th year Net Profits : NTD 4,8 millions

14/04/2023

27

8th Year: High Net Profits COST MODEL 8

Year 8 Customers 600

Variable Costs Fixed Costs

Object Unit Price Quantity Total Object Unit Price Quantity TotalDaily Furnitures Office Building 90000 200 18000000Books 800 600 480000 Computer 12000 1 12000CD players 8000 0 0 Provision 5000CDs 4000 0 0 Website 40000 1 40000Photocopies 1 62400 62400 Total Fixed Costs 18057000

Sub-Total 1 542400 FC paid Year 8 0% 0Office furniture SR Break Even Point 6486 600 3891720Tables 300 0 0 Revenues 14500 600 8700000Chairs 50 0 0 Profits Y8 4 808 280

Sub-Total 2 0 Employees Teacher 1 750 1560 1170000 Teacher 2 750 1560 1170000 Teacher 3 650 1092 709800 Secretary/TA 200 1498 299520

Sub-Total 3 3349320 Total Variable Costs 3891720

14/04/2023

28

Thanks for your Attention

Any Questions?