Jonathan is considering opening a shop for online baseball memorabilia. He has two options. He can build the web site himself and only 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, so he is planning on 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?

(a)Fixed cost = $2000 + $180 (15*12) = 2180

(b)  Unit price = $4 + $0.5 (price increase) = $4.5

(c)Unit variable cost = $3

(d)First option

(e)Second option

Explanation:

For (d) we have, first option gives (1800) as 200*(4-3) -2000= -1800 and second option give (1880) as 200*(4.5-3) – 2180.

So, he’d prefer first option because of less loss associated with it.

For (e) we have, first option gives (1300) as 700(4-3) -2000 = -1300 and second option gives (1130) because 700(4.5-3) – 2180 = -1130.

So, he would prefer second option because of less loss associated.

Part (a) Annual fixed cost for the e-commerce site option

$15×12 = $180

Part (b) The unit price for the e-commerce option

$4.50+$0.50= $4.50

Part (c) Variable cost for the self-developed site option

The only variable cost is cost of sale = $3.00

Part (d) If Jonathan sells 200 items

Prefers E- Commerce Option which  is more profitable

Part (d) If Jonathan sells 700 items

Prefers E- Commerce Option which  is more profitable

Explanation:

Part (d) If Jonathan sells 200 items

                                      Self Developed Site                 E- Commerce Option

Sales                                       800                                              900

Less VC                                  600                                              600

Contribution                           200                                              300

Less FC                                 2000                                             180

Income                                  (800)                                              120

Therefore E- Commerce Option is more profitable

Part (d) If Jonathan sells 200 items

                                      Self Developed Site                 E- Commerce Option

Sales                                      2800                                            3150

Less VC                                  2100                                            2100

Contribution                            700                                             1500

Less FC                                 2000                                             180

Income                                  (1300)                                            1320

Therefore E - Commerce Option is more profitable

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