Increasing Movie Ticket Prices
To conduct an experiment, AMC increased movie ticket prices from $9.00 to $10.00 and measured the change in ticket sales. Using the data over the following month, they have concluded that the increase was profitable. However, over the subsequent months, they changed their minds and discontinued the experiment. How did the timing affect their conclusion about the profitability of increasing prices?
The timing affected the conclusion because the demand curve at the time was showing AMC that the consumer demand was allowing consumers to be willing to pay $10 per movie ticket at the time of the increase.
Now over time the demand of going to the movie has decreased. Consumers will buy more if the price is less compared to buying less if the price is higher. So in the instance with AMC they profited from the increase for the first month but consumers stopped attending the theaters based on the higher costs.
Suppose you have a production technology that can be characterized by a learning curve.
Every time you increase production by one unit, your cost decreases by $6. The first unit costs you $64 to produce. If you receive a request for proposal (RFP) on a project four units, what is your breakeven price? Suppose that if you get the contract, you estimate that you can win another project for two more units. Now what is you break even price for those two units?
Basically to find the breakeven price for the units we would have to take the initial cost of $64 it takes to produce one unit and subtract $6 from each unit that is produced after the first unit in order to find the breakeven cost.
Unit 1: $64, Unit 2: $58, Unit 3: 52, Unit 4: $46 = $220 (total price cost); divide the total cost by 4 units which will equal a breakeven price of $55. We would have to sell each unit for the $55 to breakeven. If we added two more units the cost for unit 5: $40 and unit 6: 34. This would give a total cost of $74. Divide $74/2 = $37 which would be the breakeven price for the additional 2 units.
Multiconcept Restaurants are a growing Trend
A multiconcept restaurant incorporates two or more restaurants, typically chains, under one roof. Sharing facilities reduces costs of both real estate and labor. The multiconcept restaurants typically offer a limited menu, compared with full sized, stand alone restaurants. For example, KMAC operates a combination Kentucky Fried Chicken (KFC)/Taco Bell. The food preparation areas are separate, but orders are taken at shared point of sale (POS) stations. If Taco Bell and KFC share facilities, they reduce fixed cost by 30%; however, sales in joint facilities are 20% lower than sales in two separate facilities. What do numbers imply for the decision of when to open a shared facility vs. two separate facilities? The numbers will imply to sharing facilities when it allows the businesses to be able to reduce overhead costs in regards to economic cost or the economies of scope in regards to costs. A business will also use the marginal analysis theory into consideration of when they should take any action that would help in the businesses increasing its profits. So in sharing facilities if both businesses are able to keep costs decreased or continue decreasing over time and sales stay the same or increase, both businesses would profit on switching to a shared facility concept.