The R-S 1000: Analysis of Cost, Revenue, and Profit

The purpose of this analysis is to evaluate the cost, revenue, and profit associated with
the RS-1000 home stereo system and the conclusions that can be drawn from the data for
Lincoln Records Inc. to determine whether it is beneficial to the company to produce and
sell this new home stereo system. Currently, there is no other home stereo system with all
of the capabilities of the RS-1000, therefore many individuals within and outside of the
company expect to see an increase in overall cash flow for Lincoln Records Inc., and for
the company to gain a strategic position in the market. Lincoln Records Inc. executives
and stockholders are exceptionally interested in maximizing profits for the RS-1000, and
in turn, better understanding the cost and revenue associated with the product.

For this analysis, the total cost function C ( x ) in U.S. dollars is derived by adding the
given fixed cost to the given variable cost equation (see equation 1 in the appendix). For
the purpose of this analysis, the demand equation is also given (see equation 2). The
demand equation relates the unit price of the RS-1000 in U.S. dollars, p, to the number of
home stereo systems manufactured, x. The revenue function (see equation 3) was
obtained as a result of the product of xp . Furthermore, the profit function P ( x ) was
calculated by taking the difference between the revenue function R ( x ) and cost
function C ( x ) (see equation 4). Figure 1 depicts a graph of all 3 functions on the same
plane, which can be used for comparison purposes. By looking at Figure 1, one can notice
that the total cost function (represented in blue in Figure 1) is an increasing function on
the interval [0,) with a concave up shape. This indicates that the total cost of RS-1000
production increases at a faster and faster rate as the number of home stereo systems
manufactured increases. The revenue function (represented in red in Figure 1) shows that
the revenue function is a quadratic function that is increasing from the manufacture and
sale of 0 to 10,932 home stereo systems and then decreasing after the sale of 10932nd
home stereo system. It can also be noted that the revenue function is a concave down
shape. Differential calculus based optimization methods were applied to find the marginal
revenue function (see equation 5). Results from this calculation demonstrated that
revenue realized by the company for the RS-1000 is expected to reach a global maximum
of $7,051,272 at the sale and manufacture of 10,932 home stereo systems per day. One
can also notice that the profit function (represented in green in Figure 1) is an increasing
function on the interval [0,7342] and then a decreasing function from (7342, ] with a
concave down shape.

However, the company and stakeholders are ultimately concerned with the highest profit
yield associated with the RS-1000. Differential calculus based optimization methods were
applied to develop the marginal profit function (see equation 6). Through differential
calculus methods, this function showed that daily profits realized by the company reach a
maximum value of $3,587,750 with the manufacture and sale of 7342 home stereo
systems a day. Figure 2 depicts both the profit function and the marginal profit function
overlaid on the same graph. The primary vertical axis of this plot (on the left) applies to
the profit function and ranges between $0 and $4,000,000. The secondary vertical axis

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(on the right) applies to the marginal profit function 1(see equation 6) and ranges from -
$1250 to $1500. Results from the marginal profit function demonstrate that the company
expects about a $1000 profit from the sale of the very 1st home stereo system with profit
decreasing at a linear rate thereafter. For example, the profit realized by the sale of the
4001st home stereo decreased to approximately $500. This trend of decreasing profit
continues until the sale of the 7343rd home stereo system, where no profit is realized.
Beyond this point, the company is operating at a loss for the RS-1000, most likely due to
restrictions on revenue and excessive operating costs. For example, the loss realized by
the company for the manufacture and sale of the 8001st home stereo system is
approximately $250.

In summary, the purpose of this analysis was to better understand the cost, revenue, and
profit associated with the new RS-1000 home stereo system by Lincoln Records Inc.
Results showed that the RS-1000 profits are maximized with the sale of 7342 home
stereo systems a day with a maximum revenue of $7,051,271 and a maximum profit of
$3,587,750 at that point. It is hoped that this analysis and the results found herein will
assist Lincoln Records Inc. in carrying out the successful launch and continued
production and sale of the RS-1000, which will, in turn, have a considerable positive
impact on the future of Lincoln Records Inc. and its stockholders.

1 Two different vertical axes were appropriate for this graphic because the two functions are on
dramatically different scales and therefore achieve substantially different values over the domain of interest

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 APPENDIX:

Supporting Equations, Tables, and Graphs

3 2
C ( x )=0.000001 x 0.006 x +350 x +61,000 (1)

p=12900.059 x (2)

R ( x ) =1290 x0.059 x 2 (3)

2 3
P ( x )=940 x 0.0530 x 0.000001 x 61,000 (4)

R' ( x )=12900.118 x (5)

' 2
P ( x )=9400.106 x0.000003 x (6)

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Figure 1: Plot of Total Cost, Revenue, and Profit Functions for the RS-1000

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Figure 2: Plot of Profit and Marginal Profit Functions for RS-1000