Project%20Description

1
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
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Monopoly- Supply Demand Curves
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Revenue Function

• Revenue function

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 Revenuegtcost

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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
  year
• ii) How many drives that they expect to sell
• iii) 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
• First 500,000 - 115 per drive
• Next 600,000- 100 per drive
• 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)