Understanding Variable Costs and Business Strategies

Variable Costs are costs that vary in direct proportion to changes in output or the level of production. Possible Advantages:

• Dan, as a sole trader, has complete creative and management freedom.
• Dan can be more customer-focused due to constant interaction and communication with customers.
• Dan does not have to share the profit.

The Possible Limitations: The model assumes that all cameras are sold. Dan Electro might not be able to sell all of its cameras; therefore, the total revenue curve might not be accurate. The model is used under the assumption of unchanging conditions. Inflation and interest rates might indeed increase, which could affect the demand for the camera. The effectiveness of the model depends on the accuracy of the data. Dan might not have computed all the costs and revenue accurately. The model assumes a linear relationship, which is quite unlikely in real life. Dan might decide to reduce the price of the cameras to stimulate sales. Increase Inflow of Money:

• Dan can look for a partner. Forming a partnership can inject cash quickly, with the added benefits of knowledge and expertise. The responsibilities of running the business can also be shared. However, Dan will lose the benefits of being a sole trader—benefits such as complete freedom in decision-making and retaining all profit.
• Dan could increase the price of the cameras. Dan has very loyal and, therefore, price-inelastic customers. Some customers indicated that they would be willing to pay a higher price. This enables him to increase the price and, at the same time, increase Dan Electro’s total revenue. However, given the increase in online competition and the current customers’ perception of the camera being good value for money, this option is somewhat risky. Dan Electro might end up with fewer customers and less total revenue.

Decrease Outflow of Money:

• The main problem that can be seen from the data is the transportation cost per camera, which is a significant 22.5% of the variable costs. Dan could negotiate a reduction in such costs with the current supplier. Perhaps a bulk buying deal can be agreed upon. However, Dan will have to take the risk of being left with unsold stock, which is risky given the fast-changing technology in this market.
• Rent is currently extremely expensive. The costs for an “expensive and desirable” location are unnecessary given the fact that Dan operates an online business. A move to a cheaper and non-central location could provide a good solution. The service quality should not be harmed by this change.