Task List: ECON212-1501A-04 : Principles of Microeconomics
You are starting your own Internet business.You decide to form a company that will sell cookbooks online. Justcookbooks.com is scheduled to launch 6 months from today. You estimate thatthe annual cost of this business will be as follows:
Technology (Web design and maintenance) / $5,000Postage and handling / $1,000
Miscellaneous / $3,000
Inventory of cookbooks / $2,000
Equipment / $4,000
Overhead / $1,000
Part I
Deliverable Length:1 graph pluscalculations
You mustgive up your full-time job, which paid $50,000 per year, and you worked part-time for half of the year.
The average retail price of the cookbooks will be $30, and their average cost will be $20.
Assume that the equation for demand isQ = 40,000 – 500P, where
Q = the number of cookbooks sold per month
P = the retail price of books.
Show what the demand curve would look like for price between $25 and $35.
Address the following questions:
Suppose thatyou expect to sell about 22,000 cookbooks per month online, and assume your overhead, technology, and equipment costs are fixed. What are your total costs?
Is the business worth pursuing so far?
What market structure have you entered, and why?
What can you do to guarantee success in this market?
What pricing strategy might you use?
**I don’t know if this will help or not** Another student sent me this:
I believe additional clarity needs to be achieved in the task list and presentation on especially the phase four Individual Project.
oAmong other things, the notation that costs for the justcookbooks.com include $2,000 for Inventory of Cookbooks was somewhat troublesome in that while a variable cost for the product (the cookbooks) is certainly to be expected, the $2,000 would only cover 100 books—not a volume of books that would be of any special benefit considering we are told that we anticipate monthly sales of 22,000 books.I am uncertain whether to think that this $2,000 constitutes a variable cost associated with the inventory over-and-above the $20 per book cost noted later in the task list or that it was an estimation early in the process of compiling the information necessary to make a decision about proceeding with the venture—one that was superseded by the $20 per book cost.Additional clarification would have been nice; the fact that we project a per book retail price of $10 above the $20 cost-of-goods—a gross profit of $10 per book—may make the point a mute one, but I am not sure.
oOther questions also arise when attempting to calculate accounting and economic profits.The task list makes no mention of labor costs, nor does it specify whether the $20 per book covers the outstanding—that is, the not otherwise accounted for—shipping and handling costs.(The last remarks about the shipping and handling costs consider that while we intend to sell books, it makes no sense for us to ship all of those bought from our facility.Having as many as possible shipped to our customer from our supplier or supplier’s distribution agent should be considerably cheaper.)As written, the task list seems to indicate that values given for the Miscellaneous, Postage & Handling, and Inventory of cookbooks are variable costs but does not specify the factors that can be used to calculate them for any specific quantity of books.Thus, an honest assessment of the accounting and or economic profit potential for this business is not possible.