Here is the full question.
Jonathan is considering opening a shop for an online baseball memorabilia .He has two options. He can build the website himself and pay for hosting. This would cost him $2,000/year. The average item for sale is $4. Average costs associated with each sale are $3. His second option is to use an existing e-commerce service. This incurs an additional monthly cost of $15/month. The site takes a cut of his sales of $0.25/item, so he is planning on also increasing his prices by $0.5/item. The remaining costs stay the same .
a) What is the annual fixed cost for the e-commerce site option?
b) What is the unit price for the e-commerce option?
c) What is the variable cost for the self - developed site option?
d) If Jonathan sells 200 items , which option does he prefer?
e) If Jonathan sells 700 items, which option does he prefer?
Answer:
a) $ 2,180
b) $4.5
c) $3
d) The first option
e) The second option
Explanation:
The parameters we are equipped with from the question include:
cost of building website himself and paying for hosting = $2,000/year
average item = $4
average cost = $3
monthly cost = $15/ month
sales = $ 0.25 / item
Prices increase = $0.5/item
a) The annual fixed cost for the e-commerce site option = cost +(monthly cost × 12 months)
= $2000 ($15 × 12)
= $2000 + $180
= $ 2180
b) The unit price for the e-commerce option = (average item + price increase)
= $4 + $0.5
= $ 4.5
c) Variable Cost for the first option
= average cost
= $ 3
d) If Jonathan sells 200 items
For the first option; we have:
= number of items × (average item - average cost) - cost
= $200($4 -$3) - $2000
= $200($1) -$2000
= $200 - $2000
= - $1,800
For the second option; we have;
= number of items × ( unit price- average cost) - site option
= $200 × ($4.5-$3) - $2180
= $200 × ($1.5) - $2180
= $300 - $2180
= -$1880
∴ Here, when we sells 200 items, he will prefer the first option because lesser price is associated with it.
e)
If Jonathan sells 700 items.
For the first option; we have:
= number of items × (average item - average cost) - cost
= $700($4 -$3) - $2000
= $700($1) -$2000
= $700 - $2000
= - $1,300
For the second option; we have;
= number of items × ( unit price- average cost) - site option
= $700 × ($4.5-$3) - $2180
= $700 × ($1.5) - $2180
= $1050 - $2180
= -$1130
∴ Here, when he sells 700 items, He will prefer the second option because lesser price is associated with it.
