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.)

A. Identify uncertainties about the CVP calculations:

1. Explain why Jim cannot know for sure whether his actual costs will be the same dollar amounts that he estimated. In your explanation, identify as many business risks as you can. (Hint: For each of the costs for Jim’s business that he has not identified, think about reasons why the annual cost might be different than the amount he estimated.)

2. Identify possible costs for Jim’s business that he has not identified. List as many additional types of cost as you can.

3. Explain why Jim cannot know for sure how many computers he will sell each year. In your explanation, identify as many risks as you can.

4.Discuss whether Jim is likely to be biased in his revenue and cost estimates. D. Explain how business risk and Jim’s potential biases might affect interpretation of the breakeven analysis results.

Answer 1