Question

In eight weeks, you will be heading home for the summer (time flies when you are having fun!). A local city is running its annual carnival and has offered you an opportunity to set up a booth. In this booth, you can sell a single food item you desire (e.g. funnel case, deep-fried Oreos, hot dogs). The carnival will run from Monday through Saturday (June 8th thru June 13th) each evening from 6:00pm – 10:00 pm. In operating this booth, you will need to buy all materials, hire all of your own help (if needed), and pay 12.5% of your gross sales revenue to the S&S Amusement Company (the operator of the carnival) and 12.5% of your gross sales revenue to the city. In additional, you will have to pay the city a $200 rental costs (which includes utilities expense) for the booth for the week. Obviously, you are very busy this summer, and in order to make this opportunity a good use of your time, you need to determine the feasibility/profitability of this proposed venture. In addition, a good portion of the money you earn in the summer may go towards your college education, so it is important you are able to have some success with this opportunity. Your profit-planning task is multifaceted. You will need to think like an entrepreneur, deal with ambiguity, and make informed judgments as you gauge the practicality and financial viability of this business venture. To do that, you will need to determine your financial goals; identify the product to make and sell; understand the process of getting the product ready for sale; and identify and research all costs (direct and indirect) associated with the undertaking. In addition, you will need to perform market research to set a price for the product, estimate demand, and use CVP analysis to determine the feasibility of the one-week venture. Like an entrepreneur contemplating a new venture, you have the real-world task of gathering the relevant information ahead of you. As you proceed, you will need to decide what data (e.g. various costs, production time, capacity) to collect, and where and how to find this information. In addition, you will need to organize, analyze, and communicate information in a way that makes sense to you and to others, as you may want to convince them to collaborate with you. Other parties are often involved in lending decisions and may require reports containing detailed analyses. The specific requirements for the project are as follows: A. Determine your financial goal for this one-week venture (for example, how much money you expect to make on a net basis?). B. Briefly describe the product that you will sell at the carnival as well as all of the costs that you will likely incur during the week. Identify and define an appropriate cost driver. Classify each costs as variable, fixed, or mixed for the carnival time horizon. For mixed costs, be sure to identify the variable and fixed components. Compile, organize, and present data in a logical way. C. For each cost you identified above in (B), perform research as to the costs of the direct materials, direct labor, and overhead involved in making your product. Document your sources for each of these costs. For example, if you are selling lemonade, you should develop an estimate for the actual cost per glass. D. Perform some market research to estimate the appropriate price to charge for your product. Keep in mind that your chosen selling price will be partly a function of the financial goals and partly market-determined (i.e., the price needs to be realistic competitively). E. To ensure that this business venture is a viable ideal and not a waste of your time, you need to perform preliminary CVP analysis. This analysis provides the basis for assessing the reasonableness of this business opportunity. An important part of this break-even analysis is for you to determine the contribution margin per unit. From parts (C) and (D), you will be able to determine your contribution margin per unit. After determining your contribution margin per unit, answer the following questions: 1. What is the contribution margin per unit for your product? 2. What is the contribution margin ratio? 3. What are the total fixed costs? 4. What is the sales volume at the break-even point? 5. What is the sales revenue in dollars at the break-even point? 6. What is the sales volume in units required to reach your financial goal? 7. What is the revenue in dollars required to reach your financial goal? Excel Templates: Under graduate students: While recommended for part (E), Excel is not required. However, it provides an opportunity to practice writing formulas and creating charts. Graduate students: The Excel file is required and will be graded. This portion of course work is worth 20 points. F. In no more than two pages, summarize your results and calculate your earnings per hour to determine if this opportunity is worth your time. Use the requirements in A-F above as a guide to organize/prepare your report. The report much include the following items: (1) financial goal for the one-week venture, (2) selling price of the product as well as the market research supporting this price, (3) itemized costs of the direct materials (as well as the sources of those costs), direct labor and overhead involved in making the chosen product, (4) classification of each cost as variable, fixed, or mixed with respect to chosen cost driver; (5) break-even and target-profit analysis, (6) calculations of CVP analysis, and (7) a less-than two-page summary describing the results as well as the calculations and your decision regarding the feasibility of the product.

Answer 1

Solution:

As an entrepreneur, I got an opportunity in a food carnival which will run for one week that is 6 days starting from Monday to Saturday. The complete CVP analysis and complete profit margin and break-even analysis.

Let's take the product "Hot Dogs"

1. contribution margin of the product

2. Contribution margin ratio

3. Total fixed costs

4. Sales volume at the break-even point

5. Sales revenue at the break-even point

6. Sales volume at the break-even point

7. Revenue require to reach the financial goal

Solution 1 & 2

The product contribution margin is the difference between total sales and total variable costs. If A business to be profitable then the contribution margin must and should exceed the total fixed costs. The contribution margin may also be calculated per unit bases. The per-unit contribution margin is calculated as the unit variable cost is subtracted from the unit sales price.

If I need to produce daily 500 hot dogs and sold. then the variable cost for preparing the 500 hot dogs would be $1000. If the selling price of each hot dog would be $5 each. then,

contribution margin should be $2500 - $1000 = $1500

2. Contribution margin ratio. The contribution margin ratio is determined by dividing the contribution margin by total sales.

Contribution margin ratio = Contribution margin / total sales

= 1500 / 2500 = 3 : 5

3. Total fixed costs. fixed costs mean the costs which are fixed for the complete tenure irrespective of sales or contribution margin the fixed costs will remain the same.

Total fixed costs = 12.5% of gross sales to the amusement company the operator of the carnival + 12.5% gross sales to the city + $200 for the rental which includes utility expenses

= 500 * 5 = 2500 per day for 6 days

= 2500 * 6 = 15000

= 15000 * 12.5%

= $ 1875

= 1875+1875+200

= $3950

4. Sales volume at the break-even point. the break-even point is where there is no profit and no loss.

break-even point = fixed costs/contribution margin

where the contribution margin = total sales - variable costs

fixed costs = $3950

variable cost per unit = $2

sales price per unit = $5

Desired profit margin = $3

the break-even point for 500 units

500 units = 3950 / ( 5 - 2)

=1317

The Break-even point as volume-based is approximately 264 units of hot dogs. The remaining beyond 264 would be profit margin or profit goal

= 500 - 264

= 236 hot dogs is a profit. if we convert it into the price that could be 236 * 5 = $1180 per day profit

= 1180 * 6 = $7080 is complete profit goal for this 6 days event