Transcript Introduction to project1 & Preliminary report

Project Description
Business Background
 Class Project
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Business BackgroundProduction 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 BackgroundMarket Structures
Perfect Competitive markets
Eg: Wheat/Corn
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Monopolies
Eg: Microsoft/Standard oil
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Project 1 – Main Goal
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Determine optimal price & quantity for
a new product
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Business BackgroundMarket Structures
Perfect Competitive
Monopolies
markets
 One seller
 Large number of
 Significant barrier to
buyers & sellers
entry(Eg: control over vital
 Easy Entry and exit
raw materials/ Legal
restrictions/Economies of
 Totally undifferentiated
Scale)
product
 Product differentiation
 Individual company
has no control over
 Has control over PRICE
PRICE
 Production decisions Production
OUTPUT and PRICE
decisions-OUTPUT
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Demand Function
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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 CompetitorSupply & Demand Curves
Price
Demand
Supply
Quantity
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MonopolySupply & Demand Curves
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Revenue Function
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Revenue function
q p
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
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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 BackgroundProfit
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 BackgroundTest 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
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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
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1)
2)
3)
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
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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 Reportcontd.
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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 Reportcontd.
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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)
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