Question

You are going to start a company selling bottles of bacon soda (not baking soda). You have determined that to bottle your masterpiece, you’ll need to pay a bottling company $1.45 per bottle produced. They can send you 10 cases (48 bottles per case) for a $240 shipping cost. You’ll also need to hire someone to place your labels on each bottle once they arrive from the bottling company. You pay $.25 per label from an online supplier. Let’s assume you are paying someone $.05 for each label placed on a bottle. Since you will use a direct selling process, you will not incur a shipping fee to get each bottle to your customers. However, you decide to expand your distribution by offering $.25 per bottle sold as a commission to anyone who would help you sell your product.

In addition to your product costs, you have some other costs. You decide to be responsible and get business insurance. This costs you $25 per month. You will be running your business out of your home, so you won’t incur costs for utilities, rent, or depreciation. However, you took a loan from your rich uncle for $5,000. To pay back that loan, you must pay him $50 per month. You also decide to put an ad. in the local newspaper each month to get the word out about your new bacon soda. That ad costs you another $50 per month.

Through market research, you have estimated that you will sell all 10 cases from your initial order in the first month of operation. You have also estimated that you will be able to sell 20 cases per month for the second and third months, and then 40 cases per month for months 4 and 5 of operation.

You decide to use the “keystoning” approach to price your bottles of bacon soda. This means you will double your total variable costs per unit to determine your price.

Respond to the following questions and tasks. Be sure to show your calculations where needed.

1. What is the one-unit cost of bacon soda? (Identify both variable and fixed costs in calculating the one-unit cost.)

2. Create a five-month pro forma for the bacon soda company

PRO FORMA

	Month 1	Month 2	Month 3	Month 4	Month 5	Total
Sales
Revenue
Units Sold
COGS
Gross Profit
Fixed Expenses
Insurance
Advertising
Loan
Variable Expenses
Labels
Labor
Commission
Shipping
Bottles
Total Expenses
Net Profit

ONE UNIT COST (COGS)

Answer 1

a. Cost per unit of bacon soda is

Variable Cost components	No of bottles	Cost per bottle	Value($)
Bottling cost	480	1.45	696
Shipping cost	480	0.5	240
labelling cost	480	0.3	144
Selling commision		0.25	0.25
Variable cost per bottle		2.5
Total Variable cost			1200
Fixed cost components
Business insurance per month			25
Loan Repayment per month			50
Advertisement cost per month			50
Total cost			1325
Cost per unit of bacon soda bottle			2.76042

b. Five month proforma for bacon soda company is as follows .

Particulars	1st month	2nd	3rd	4th	5th	Total
Sales (Bottles)	480	960	960	1920	1920
Sale price per unit	5	5	5	5	5
Sales revenue($)	2400	4800	4800	9600	9600	31200
Units sold	480	960	960	1920	1920
COGS	1325	2650	2650	5300	5300
Gross profit	1075	2150	2150	4300	4300
Fixed expenses
Insurance	25	25	25	25	25
Advertising	50	50	50	50	50
Loan	50	50	50	50	50
Variable expenses
Labels	120	240	240	480	480
Labour	24	48	48	96	96
Commision	120	240	240	480	480
Shipping cost	240	480	480	960	960
Bottle cost	696	1392	1392	2784	2784
Total expenses	1325	2525	2525	4925	4925	16225
Net profit	1075	2150	2150	4300	4300	13975