1 Project Description  Business Background  Class Project

2 Business Background- Production decisions  One of the most important decisions made by companies  Determining how many units of each product to produce and sell

3 Business Background- Market Structures  Perfect Competitive markets Eg: Wheat/Corn  Monopolies Eg: Microsoft/Standard oil

4 Project 1 – Main Goal  Determine optimal price & quantity for a new product

5 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

6 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

7 Perfect Competitor- Supply & Demand Curves

8 Monopoly- Supply & Demand Curves

9 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

10 Total cost function  Total Cost= Fixed Cost + Variable cost

11 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

12 Business Background- Profit  Profit = Revenue – Cost  Positive Profit When Revenue>cost

13  When a new product is developed Production & engineering departments provide estimates of these COSTS (show excel file marketing data for class project)

14 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

15 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

16 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

17 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?

18 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?

19 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

20 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

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

22 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

23 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

24 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)