Teacher's Notes
Theme:
Entrepreneurs use the principles of marginal cost analysis to make business decisions.Sub-theme:
Information about market characteriustics lowers the risk of investment.Concepts:
- utility
- marginal cost
- market information
- marginal revenue
Performance objectives -- this lesson focuses on developing skills at:
- Identifying factors relevant to business decisions
- Weighing and making calculations on factors bearing on a business decision
- Prioritizing elements of a complex decision
Price. 200 dogs per day @ $1 each = $200... 175 dogs per day @ $1.25 each = $218.75... 150 dogs per day @ $1.50 each = $225... 125 dogs per day @ $1.75 each = $218.75
Employee. 6 hours @$5/hr. adds $30 per day to our costs. The employee would enable us to sell 25% more dogs, or 250 @ $1.00 apiece. $250 revenue - $30 wages = #220.
Expanding the stand. For a $200 investment, plus $30/day for the employee, we can sell 300 dogs per day @ $1 apiece. The cost of production is 90¢ -- 80¢ + 10¢ per dog for the employee. That leaves us with a net profit of 300 x 10¢ or $30 to divide between our wage, and paying for the capital improvement.
Expanding the product line. We're testing the market by bringing fifty footlongs/day, which cost us $1.25 each. Our highest profit margin among these options was when we were selling 150 dogs per day at $1.50 each: $1.50 - 80¢ = 70¢. That gross profit rate is 70˜ / $1.50, or 46%. To get that rate, we'd have to solve the equation (1.00 - .46)X = 1.25, for which X = $2.31.
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