You plan to start a business selling premium kitchen cabinets you will manufacture in a small...

You plan to start a business selling premium kitchen cabinets you will manufacture in a small shop in your back yard. You estimate that you have fixed

costs associated with these activities of $500 per month. You estimate the cost of lumber and other wood for each set of cabinets to be $1350. Supplies

including clasps, hinges, nails, and screws cost $75 per set of cabinets. You pay a local teenager $12.00 / hr to do sanding and staining of the cabinets,

and he works 5 hours on each set of cabinets. You would like to pay yourself about $800 for each set of cabinets sold. As there are only 2 employees, you can

realistically only build 2 sets of cabinets a month. Any profit made once you clear expenses will go into owners equity.

Calculate the break-even point for this operation, and detrmine the price you will set for each set of cabinets. Make sure you show all work and state assumptions.

You have moved your cabinet making business to a larger shop where you can have a much higher production capacity. You estimate the cost of materials

to be the same as when they were made in your back yard. You hire 2 carpenters to work in the shop, who are each capable of building 3 complete sets of cabinets

in a month, and you pay each a monthly salary of $2100 / month. You continue to pay a local teenager $12.00 / hr to do sanding and staining of the cabinets,

and he still works 5 hours on each set of cabinets. You now pay $14,000 / year in rent and utilities for the shop. You do not work to build cabinets, as you are

now busy handling sales, and you pay yourself a commission of $250 for the sale of each set. Any profit made once you clear expenses will go into owners equity.

Calculate the break-even point for this operation, and determine the price you will sell each of the sets of cabinets for. Make sure you show all work and state assumptions.

Compare the two operations and comment on which operation is the more profitable. Which is more viable in the long term?
What is the primary factor in the variation between the two break-even points?
What are some risks associated with each plan that should be considered?
For you personally, which operation will produce the most income?

Expert Solution

jeff jeffy answered 2 years ago

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