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Project Description Business Background Class Project

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Business Background- Production decisions

One of the most important decisions made by companies

Determining how many units of each product to produce and sell

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Business Background-Market Structures

Perfect Competitive markets

Eg: Wheat/Corn

Monopolies

Eg: Microsoft/Standard oil

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Project 1 – Main Goal Determine optimal price & quantity for

a new product

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Business Background-Market Structures

Perfect Competitive markets

Large number of buyers & sellers

Easy Entry and exit Totally undifferentiated

product Individual company has

no control over PRICE Production decisions-

OUTPUT

Monopolies One seller Significant barrier to

entry(Eg: control over vital raw materials/ Legal restrictions/Economies of Scale)

Product differentiation Has control over PRICE Production decisions-

OUTPUT and PRICE

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Demand Function

Demand Curve- A monopolist has a downward sloping curve

Demand function-relates the price that a company can charge for each unit of its product to the quantity of the product it sells

Can estimate properties Overall slope has business implications

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Perfect Competitor- Supply & Demand Curves

Quantity

Pri

ce Demand

Supply

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Monopoly- Supply & Demand Curves

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Revenue Function Revenue function

pq

q -the number of units of a good that are sold

p- the price per unit at which that good is sold

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Total cost function Total Cost= Fixed Cost + Variable cost

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Total cost function Fixed costs of production- incurred even if

the company produces no units of its goods

Eg: Executive salary/Rent/Insurance/Production facility and equipment

Variable costs – incurred on a unit-produced basis

Eg: cost of raw materials/wages of assembly workers

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Business Background-Profit

Profit = Revenue – Cost Positive Profit

When Revenue>cost

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When a new product is developed

Production & engineering departments provide estimates of these COSTS

(show excel file marketing data for class project)

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Business Background-Test Marketing

to predict national sales Used to forecast the demand for a new

product Test marketing is extremely useful

Because it is

1. Cost effective

2. Time saving

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Class Project Company – Save-it-All Product – SXL computer drive The company has exclusive rights to produce and

market new technology during the coming 3 years Temporary monopolistic power Hope to find I) how to price the SXL in such a way that it will

produce the maximum profit during the coming yearii) How many drives that they expect to selliii) How much profit they might hope to realize from

sales

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Class Project Number of Potential customers- 120 million 6 test markets – to determine the fraction of

the potential buyers who would actually purchase the SXL, at various price levels

Results – Marketing Data.xls SXL drives will have a quadratic demand

function

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Goals

1. What price should Save-it-All! put on the drives, in order to achieve the maximum profit?

2. How many drives might they expect to sell at the optimal price?

3. What maximum profit can be expected from sales of the SXL?

4. How sensitive is profit to changes from the optimal quantity of drives, as found in Question 2?

5. What is the consumer surplus if profit is maximized?

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Goals-Contd.

6. What profit could Save-it-All! expect, if they price the drives at $154.49?

7. How much should Save-it-All! pay for an advertising campaign that would increase demand for the SXL drives by 10% at all price levels?

8. How would the 10% increase in demand effect the optimal price of the drives?

9. Would it be wise for Save-it-All! to put $4,000,000 into training and streamlining which would reduce the variable production costs by 7% for the coming year?

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Production cost estimates Fixed overhead cost - $ 21,600,000 Variable cost

1) First 500,000 - $ 115 per drive

2) Next 600,000- $ 100 per drive

3) All drives after the first 1,100,000-

$ 90 per drive

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Team Project Each team will receive an Excel file Test market data Trend line directions Production cost estimates Assume you have a temporary

monopoly for the sale of all similar items

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Each team will be have similar questions as in the class project goals

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Preliminary Report Preliminary Report Teams & Data for Project 1 on Class

website 3-5 minutes PowerPoint presentation You will be asked 1-2 questions about the

presentation You need to give me a copy of the PPT

presentation (size 6X4) Dress Code- Business Casual

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Preliminary Report-contd. Read about report on Should start the presentation by introducing the

team A Discussion of the problem Definitions Project Assumptions Study of Historical Data Evaluation Form for the Presentation is posted on

the class website

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Preliminary Report-contd. Give a name and description for your Team product ( Show

example team 1 excel file) Tentative decisions for the questions

1. What price should you put for the Team product, in order to achieve the maximum profit?

2. How many drives you expect to sell at the optimal price?

3. What maximum profit can be expected from sales of the Team product?

(based on problem data/common sense/ business considerations)