Question

After taking business classes, Hannah decided to start her own web-based business that would make use of one of her hobbies.  She is selling custom-ordered, fabric headbands over the internet for $10 each.  Shipping and handling costs are paid by the customer.  The fabric and elastic used to make the headbands costs $1 per headband. Hannah’s mother, aunt, and sister, who are avid seamstresses, have agreed to sew the headbands for a price of $3 each. (They serve as contract manufacturers.) Hannah has also hired an internet marketing firm to maintain the web site and place banner ads on search engines and other websites.   This firm charges Hannah $1,000 per month plus 20% of sales revenue.  Hannah also spends $500 per month on other operating expenses such as travel, internet access, textile industry membership fees, lease of her office equipment, etc.  Hannah believes she can handle the business unless it grows beyond 4,000 units a month.   If volume exceeds 4,000 per month, she’ll need to hire additional help in managing the business, as well as non-family members who might charge more to do the work.

1. What is Hannah’s gross profit per headboard?
2. Which measure of profitability gives managers a more realistic idea of profitability? Why?
3. How is a contribution margin income statement formatted?   Create one for Hannah’s business, assuming she sells 2,300 headbands in June.  
4. Where can CM income statements be used?   Why do managers like them?   Let’s say volume increases 10%....what does this mean when looking at the statement?
5. Use the concept of CM/unit to predict operating income:  What would Hannah expect for operating income if she is able to sell 3,800 headbands one month? Could we predict operating income for a month in which 4,500 headbands are sold?
6. CVP analysis is often used for predicting the number of units that would need to be sold to 1) breakeven or 2) earn a target level of operating income.  What is the formula used for these calculations?   How is it derived?
7. Before Hannah started her business, she wanted to know how many headbands she would need to sell a month just to breakeven. If volume wasn’t expected to be this high, she wouldn’t start the business. How many headbands does Hannah have to sell each month just to breakeven?  
8. How many headbands would Hannah have to sell to earn a target profit of $8,000 per month?
9. How is the contribution margin percentage defined?   What is the contribution margin percentage on Hannah’s headbands?  What does it tell Hannah?
10. Use the concept of CM % to predict operating income:   What would Hannah expect for operating income if she generates $32,000 in sales revenue one month?
11. Larger companies, such as Home Depot or Dick’s sporting goods would not want to state breakeven in terms of units, but rather, in terms of sales revenue.  What formula can be used to determine the sales revenueneeded to breakeven?
12. Use this shortcut formula to find breakeven for Hannah’s business
13. CVP analysis is very helpful for solving isolated business decisions and “what if” questions:
14. Hannah is thinking about using direct mail advertising to create more awareness of her company.   The direct mail company will charge a flat, one-time fee of $8,000 to send out one bulk mailing to households with young children in her area.   How many extra headbands will Hannah have to sell to make direct mail advertising worthwhile?

Answer 1

		Gross Profit per headboard
		Sales Revenue per unit	$10.00
		Total Cost per unit:
		Direct material cost	$1.00
		Direct Labor Cost	$3.00
		Cost of goods sold	$4.00
		Gross Profit per headboard	$6.00	(10-4)
		Operating Income after deducting Operating and Sales expenses will give better measurement
		Gross Profit does not include Sales and Administration expenses
		CONTRIBUTION MARGING INCOME STATEMENT
	A=2300*10	Sales Revenue	$23,000
		Variable Costs:
	B=2300*1	Direct material cost	$2,300
	C=2300*3	Direct Labor Cost	$6,900
	D=A*20%	Sales Expenses	$4,600
	E=B+C+D	Total Variable Costs	$13,800
	F=A-E	Contribution Margin	$9,200
		Less: Fixed Costs
	G	Advertising expenses	$1,000
	H	Operating Expenses	$500
	I=G+H	Total Fixed Costs	$1,500
	J=F-I	Operating Income	$7,700
		CM statements are useful in predicting Net Income at different levels of activity
		If Volume increases by 10%	2530	(2300*1.1)
		CONTRIBUTION MARGING INCOME STATEMENT
	A=2530*10	Sales Revenue	$25,300
		Variable Costs:
	B=2530*1	Direct material cost	$2,530
	C=2530*3	Direct Labor Cost	$7,590
	D=A*20%	Sales Expenses	$5,060
	E=B+C+D	Total Variable Costs	$15,180
	F=A-E	Contribution Margin	$10,120
		Less: Fixed Costs
	G	Advertising expenses	$1,000
	H	Operating Expenses	$500
	I=G+H	Total Fixed Costs	$1,500
	J=F-I	Operating Income	$8,620
		If Volume increases to 3800	3800
		CONTRIBUTION MARGING INCOME STATEMENT
	A=3800*10	Sales Revenue	$38,000
		Variable Costs:
	B=3800*1	Direct material cost	$3,800	ekkarill92 Next > < Previous Related Solutions Business Description After taking business classes, Jake, an avid dog-lover, decided to start selling unique pet... Business Description After taking business classes, Jake, an avid dog-lover, decided to start selling unique pet supplies at trade shows. He has two products:   Product 1:   "Launch-it"-   a tennis ball thrower that will sell for $10. Product 2: "Treat-time"- an automatic treat dispenser that releases a treat when the dog places his paw on the pedal.   The treat dispenser will sell for $30. Costs:    Jake has hired an employee to work the trade show booths.   The work contract is $1,000... CVP Problem Business Description: After taking business classes, Jake, an avid dog-lover, decided to start selling... CVP Problem Business Description: After taking business classes, Jake, an avid dog-lover, decided to start selling unique pet supplies at trade shows. 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