Question

Better Footprint Shop, a fair-trade environmentally friendly gift shop, purchases goods from developing countries. The owner of the shop, Paula Miranda, is thinking of adding a fundraising program which would encourage nonprofit organizations such as schools, churches and community groups to sell fair trade chocolates. The nonprofit organization would sell the candy bars for $3/candy bar and Better Footprint would give them a $1.25/candy bar sales discount. In other words, Better Footprint would collect $1.75/candy bar from the nonprofits. Better Footprint would not require a minimum sales quantity from the organizations. Better Footprint however must order the chocolates from the national organization at least one month in advance and they cannot be returned. The chocolates cost $.75/candy bar with a minimum order of 500 candy bars. Any additional candy bars would have to be ordered in increments of 100. The national organization charges a flat $25 shipping fee per order. Better Footprint would order once per month. Since the fundraising plan would not require any additional facilities and negligible processing costs, the only costs associated with the project for Better Footprint would be the $.75 cost of the candy bars and the shipping cost. REQUIRED a.What term best describes the cost behavior for the candy bars? The shipping cost? Use candy bars sold as the activity base. b. To make the project worthwhile, Paula would like to earn a before tax profit of $1,275 for the first month of the venture. What level of sales in units and dollars for the month would be required to meet this target net income amount? SHOW AND LABEL ALL COMPUTATIONS. c.Assume that the venture is undertaken and an order is placed for 1,000 candy bars in the first month. How many candy bars would Paula have to sell to break even for the month? SHOW AND LABEL COMPUTATIONS. d.If Paula would like to earn a pretax profit of $2,000 in the first month how many candy bars would she have to sell in the month to meet this target net income amount? SHOW, LABEL AND EXPLAIN COMPUTATIONS. (Remember Better Footprints must order candy bars in increments of 100). e.After running the program for the past year, Paula has determined that the fundraising program has not met her expectations and she will discontinue it. She has 150 candy bars remaining and is considering selling them at a discounted price to Better Footprint’s largest fundraising partner. One of the volunteers at the shop told Paula that she would be increasing her profits if she sold the remaining candy bars at any amount since there are no incremental costs. Paula is confused because she believes that she can’t increase profits if she doesn’t charge at least $1.75 - enough to cover her costs. Who is right? Justify your answer. What other factors should Paula consider before selling the remaining candy bars at a discounted price? (You should have a minimum of 3-4 factors to consider.)

Answer 1

a. The purchase cost of $ 0.75/ candy best describes the cost behavior, as it is directly related to the product. The shipping cost of $25 per shipping order also describes the behavior of product.

b.
Required profit = $1275
Sales price = $ 1.75/per product
Purchase price = $0.75/ per product.
Shipping cost = $ 25 per order
Let the number of units = x
Sales - cost = Profit
(1.75-0.75)*x - 25 = 1275
x = 1300
At 1300 units, Better Footprint shop will able to earn aa profit of $1275.
Sales Unit = 1300
Sales Amount = 1300* $1.75 = $2275

C.
Break even calculation
Let breakeven units be x
At breakeven, profit = 0
Sales - cost = 0
(1.75-0.75)x-25 = 0
x = 25
breakeven sales units = 25
Sales Amount = 25* $1.75 = $43.75
d.
Required profit = $2000
Sales price = $ 1.75/per product
Purchase price = $0.75/ per product.
Shipping cost = $ 25 per order
Let the number of units = x
Sales - cost = Profit
(1.75-0.75)*x - 25 = 2000
x = 2025
At 2025 units, Better Footprint shop will able to earn aa profit of $2000.
But better footprint can only order in the multiple of 100, so minimum order would be 2100 units to earn a profit of $2000.
Sales Unit = 2100
Sales Amount = 2100* $1.75 = $3675

e.
Paula has already incurred the shipping cost for the products which is sunk cost for her. Now the cost that remains is the product cost which is $0.75/per product. If she sells the products at a pice higher then the purchase cost she would earn profit. The statemnet of her volunteer to sell the product at any price is not correct as selling the product below $ 0.75 would result into loss for paula.
					Factors considered by paula are :
					1	Selling price should not be less then $0.75/per item.
					2	If any additional cost is to be incurred in selling the product , that should be added in the selling price.
3	It should be considered that whether the buyer is giving instant payment or availing for any credit period.