Question

Jim Jasons is thinking about starting a company to produce high performance video gaming computers. He loves playing video games. He sees it as an opportunity to be his own boss, making a living doing what he likes best. Jim paid $1,000 for training, and he has already purchased new equipment costing $10,000 to assemble the computers. He estimates that it will cost $750 in materials (case, monitor, keyboard, graphics card, CPU, etc.) to make each computer. If he decides to make computers full time, he will need to rent office and manufacturing space at an estimated $1,200 per month for rent plus another $300 per month for various utility bills. Jim would perform all the manufacturing and run the office, and he would like to pay himself a salary of $5,000 per month. Jim plans to hire two salespeople at a base salary of $1,500 each per month plus a commission of $100 per computer. Jim plans to sell each computer for $1,500. He believes that he can sell 50 computers in December for Christmas, but he is not sure what the sales will be during the rest of the year. However, he is sure that the computers will be popular because so many of his friends play video games. Overall, he is confident that he can pay all his business costs, pay himself, the monthly salary of $5,000 and earn at least $2,000 more than that per month. (Ignore income taxes.)

The following questions will help you analyze the information for this problem. Use Excel for all calculations and Microsoft Word for the written portion. One team member will submit one file in Canvas. You will be graded on accuracy and organization.

A. Preform analyses to estimate the number of computers Jim would need to manufacture and sell each year for his business to be financially successful:

1. List all the costs described and indicate whether each cost is (a) a relevant fixed cost, (b) a relevant variable cost, or (c) NOT relevant to Jim’s decision.

2. Calculate the contribution margin per unit and the contribution margin ratio.

3. Write down the total cost function for the computers and calculate the annual breakeven point in units and in revenues.

4. How many computers would Jim need to sell annually to earn $2,000 per month more than his salary?

B) Suppose Jim asked for your advice. Use the information you learned from the preceding analyses to write a memo to Jim with your recommendations.

PART A ANSWERED:

1.) Relevant Fixed Costs Monthly: Rent $1,200, Various Utility Bills $300, Own Salary $5,000, Base salary for salespeople $3,000 (1500*2), Total Fixed Cost per month $9,500, Relevant Variable Cost per unit: Cost of materials $750, Sales Commission $100, Total Variable Cost per unit $850 Not Relevant to the decision, Cost of trainning $1,000, Cost of Equipment $10,000, These are sunk cost, already incurred CONTRIBUTION MARGIN Sales Price per unit $1,500 Variable cost per unit $850 Contribution Margin per unit=1500-850 $650 Contribution Margin Ratio=650/1500= 0.433333 3 TOTAL COST FUNCTION: TC=850Q+9500 TC=Total Cost Q=Quantity Sold Breakeven Point in Units=Fixed Cost/Unit Contribution Margin Breakeven Point in Units=9500/650 14.61538 Rounded to whole number, Break even point in units 15 Break Even point in Revenue=$1500*15 $22,500 4 Net Earning =$2000 Number of Units to be sold=15+2000/650 =18

PLEASE JUST ANSWER PART B! (BOLDED)Thx you

Answer 1

MEMORANDUM TO:   BOARD OF DIRECTORS

FROM: EXECUTIVE DIRECTOR, ASSOCIATION FOR A COMPANY

DATE:   12 OCT 2020

RE:   SUMMARY OF FINANCIAL RESULTS AS OF YEAR ENDED

THE PURPOSE OF THIS MEMO IS TO SUMMARIZE THE FINANCIAL RESULTS OF ASSOCIATION FOR A BETTER COMMUNITY (ABC) AS OF YEAR ENDED.  PLEASE FIND A COPY OF THE FOLLOWING REPORTS IN THIS BOARD PACKAGE

EXPENSES REPORTS:

ABC EXPECTED TO GENERATE A SURPLUS OF $2000 BY THE END OF THE PERIOD

· PERSONNEL: SALARY EXPENSES OF $3000 AND TRAINING COST $1000

·RENT AND OTHER EXPENSE RELATED TO PREMISES ARE :$1500

· SUPPLIES & MATERIALS: $13500

TOTAL SALES : $27000

· THE SELLING EXPENSES ARE $100

· TOTAL ASSETS AS OF YEAR ENDED IS $10000 IN NET FIXED ASSETS

· RATIO ANALYSIS:

GENERALLY, THE HIGHER THE GROSS PROFIT MARGIN THE BETTER. A HIGH GROSS PROFIT MARGIN MEANS THAT THE COMPANY DID WELL IN MANAGING ITS COST OF SALES. IT ALSO SHOWS THAT THE COMPANY HAS MORE TO COVER FOR OPERATING, FINANCING, AND OTHER COSTS.

GROSS PROFIT MARGIN SHOWS THE PERCENTAGE OF REVENUE THAT EXCEEDS A COMPANY'S COSTS OF GOODS SOLD. IT ILLUSTRATES HOW WELL A COMPANY IS GENERATING REVENUE FROM THE COSTS INVOLVED IN PRODUCING THEIR PRODUCTS AND SERVICES.

THE COMPANY IS EARNING A GOOD PROFIT MARGIN AND HAVING A HIGHER PERCENT OF PROFIT IN RELATION TO ITS COST INCURRED.