Transcript Production decisions - University of Arizona Math

Project Description
Business Background
 Class Project
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Project 1(Marketing Computer Drives)
– Main Goal
Product (Class project)- 12-GB
external computer drive
 Company(Class project)- Card Tech
 Determine optimal price & quantity for
a 12-GB (new product)
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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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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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Perfect CompetitorSupply & Demand Curves
Price
Demand
Supply
Quantity
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MonopolySupply & Demand Curves
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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( Eg:We will find the
equation of the demand function to build the
project)
Overall slope has business implications(Eg:
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Downward slope linked to monopoly)
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(unit price)
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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 unitproduced 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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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 –Card Tech, Inc
 Product –the 12-GB (external 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 12-GB 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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Goals
1. What price should Card Tech put on the
drives, in order to achieve the maximum profit?
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2. How many drives might they expect to sell
at the optimal price?
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3. What maximum profit can be expected
from sales of the 12-GB?
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4. How sensitive is profit to changes from
the optimal quantity of drives, as found in Question
2?
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5. What is the consumer surplus if profit is
maximized?
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Goals-Contd.
6. What profit could Card Tech expect, if they price
the drives at $299.99?
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7. How much should Card Tech pay for an advertising
campaign that would increase demand for the 12-GB drives by
10% at all price levels?
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8. How would the 10% increase in demand effect the
optimal price of the drives?
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9. Would it be wise for Card Tech to put $15,000,000
into training and streamlining which would reduce the variable
production costs by 7% for the coming year?
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Class Project
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Number of Potential customers- 350 million
6 test markets – to determine the fraction of
the potential buyers who would actually
purchase the 12-GB, at various price levels
Results – Marketing Data CBD.xls
Project Assumptions
– 12-GB drives will have a quadratic demand
function
– Assume you have a temporary monopoly for the
sale of all similar items
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Test Market Details
Test Markets
Market
Number
Market
Size
Price
Projected Yearly
Sales
(number of drives)
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2
3
4
5
6
144,900
4,627,600
1,049,800
2,946,500
5,042,300
3,617,600
$265.95
$276.95
$287.95
$299.95
$310.95
$321.95
570
17,178
3,801
9,941
15,594
10,859
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Production Cost
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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Production cost
estimates
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1)
2)
3)
Fixed overhead cost - $135,000,000
Variable cost
First 800,000 - $ 160 per drive
Next 400,000- $ 128 per drive
All drives after the first 1,200,000$ 72 per drive
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Team Project
Each team will receive an Excel file
 Test market data
 Trend line directions
 Production cost estimates
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Team Project
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Each team will 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
Evaluation Form for the Presentation is
posted on the class website
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Preliminary Reportcontd.
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Should start the presentation by introducing the
team
Give a name and description for your Team product
( Show example team 1 excel file) & pick a name
for your company
A Discussion of the problem
Definitions
Project Assumptions
Study of Historical Data
Analysis/calculations/logical process used to find
the results for your recommendations
Recommendation(optimal price,quantity, profit)
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Preliminary Reportcontd.
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Tentative decisions for the following questions should be your
objective for the presentation. You need to decide on an
optimal price/optimal quantity/optimal profit.
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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