Question

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 per month plus a commission equal to 10% of revenue.    Jake will also spend $500 per month on trade-show entry fees. Jake is purchasing the products from a supplier in Mexico.    Launch-its cost $1 each;   Treat-times cost $7 each.     Shipping and handling on the Launch-its will cost $2 each; Shipping and handling on the Treat-times, which are heavier, will cost $8 each. The shipping and handling costs will be paid by Jake, not the customer.

Assume Jake expects to sell 200 Launch-its and 100 Treat-times during his first month of operations (June).

Jake's financial goal is to earn an operating income of $8,000 per month.    He believes volume may grow at a rate of 5% a month.

Directions

You have been hired by Jake to build a CVP model that will help him understand the impact of business conditions on his operating income. (See "Starting File" worksheet.) In your model, all of the original assumptions will be listed in one area of the spreadsheet (blue box).   All other calculations in the model will reference the assumptions (blue box) such that if any assumption changes, the effect will ripple through the entire model.    To accomplish this goal, you will use FORMULAs, rather than numbers, in every other cell in the worksheet. In other words, the only place you will type numbers is the blue assumptions box.

FORMATTING conventions to use throughout project:

- Round all UNITS to the nearest whole unit.   Use the "decrease decimals" button on your tool bar rather than the Rounding function.

- Show all MONETARY amounts as dollars and cents. Round to the nearest cent. ($x.xx). Use the "decrease decimals" button rather than the rounding function.

- Show all percentages as %, not as decimals.   (x%, not .xx)

- Right justify all cells   (numbers should be to the right side of the cell, not in the middle or left)

1) Complete the assumptions (blue box) based on the data about Jake's business. Identify and list all variable costs separately and all fixed costs separately before finding the total for each type of cost.

2) Complete the Product Analysis (yellow boxes) assuming Jake only sells either Product #1 (Launch-its) OR Product #2 (Treat -times).

Check figures:    B/E Product #1 = 250 units;   B/E Product #2= 125 units

3) Complete the pro forma CM Income Statement for the month of June (green box). HINT:   On product line income statements such as this, the fixed costs are only listed in the total column.   Make sure you also show the totals for all other line items. Finally, calculate the overall weight average contribution margin (WACM) % for the company.

Check figure: Operating income = $900   WACM% = 48%

4) Calculate the WACM per unit (in orange box).

Check figure:   WACM/unit = $8.00

5) Use the WACM/unit to calculate the TOTAL number of units needed to breakeven (TOTAL column in the first gray box).   THEN, calculate the number of EACH type of product needed to breakeven.   Finally, calculate the sales revenue associated with this volume for EACH product, and then the sales revenue to breakeven in total.

Check figures:    B/E Product #1 = 125;   B/E Product #2= 63

6) Use the WACM/unit to calculate the total number of units needed to achieve Jake's target profit (TOTAL column in the second gray box).   THEN, calculate the number of EACH type of product needed to achieve the target profit.   Finally, calculate sales revenue associated with this volume for EACH product, and then the sales revenue in total.

Check figures:    B/E Product #1 =792;   B/E Product #2= 396

7) Calculate the margin of safety (MOS) using June sales as the expected sales (purple box). Calculate the MOS in terms of sales revenue and as a percentage.   Also calculate the current operating leverage factor (round to the nearest 2 decimal places) and use it to determine the expected percentage change in operating income stemming from an expected change in sales volume.    

Check figures:    MOS%= 38%;   Operating leverage factor= 2.67

ASSUMPTIONS
Product #1:	Launch-it
Sales price per unit
Variable costs per unit:
Total variable cost per unit
Monthly volume
Product #2:	Treat-time
Sales price per unit
Variable costs per unit:
Total variable cost per unit
Monthly volume
Fixed costs per month:
Total fixed costs per month
Target profit per month
Expected change in volume (%)

Product #1	Launch-it
Unit CM
CM %
Breakeven point:
-in units
-in sales revenue
Target profit volume:
-in units
-in sales revenue
Product #2	Treat-time
Unit CM
CM %
Breakeven point:
-in units
-in sales revenue
Target profit volume:
-in units
-in sales revenue

Jake's Pet Supplies
Pro Forma Contribution Margin Income Statement
For the month ending June 30
	Product #1	Product #2	Total
Sales price
Less: variable costs
Contribution Margin
Less: fixed costs
Operating income
WACM %
Calculation of Weighted average CM per unit
	Product #1	Product #2	Total
CM/unit
Sales mix (# sold of each)
Contribution margin
WACM/unit
Multiproduct Breakeven point:	Product #1	Product #2	Total
-in units
Sales revenue at breakeven
Multiproduct Target profit point:	Product #1	Product #2	Total
-in units
Sales revenue at target profit
Margin of Safety (in $)
Margin of Safety %
Operating Leverage Factor
Expected % change in operating income (%)

Answer 1

ASSUMPTIONS
Product #1:	Launch-it		Product #2:	Treat-time
Sales price per unit	10		Sales price per unit	30
Variable costs per unit:			Variable costs per unit:
Product cost	1		Product cost	7
Shipping & handling	2		Shipping & handling	8
Sales commission (10*S.P)	1		Sales commission (10*S.P)	3
Total variable cost per unit	4		Total variable cost per unit	18
Contribution /unit(10-4)	6		Contribution /unit(30-18)	12
Monthly volume	200		Monthly volume	100
			Fixed costs per month:
			Work contract	1000
			Trade show entry fees	500
			Total fixed costs per month	1500
			Target profit per month	8000
			Expected change in volume (%)	5%

Product #1	Launch-it		Product #2	Treat-time
Unit CM	6		Unit CM	12
CM %=6/10=	60%		CM %=12/30=	40%
Breakeven point:			Breakeven point:
-in units=1500/(10-4)	250		-in units(1500/(30-18)=	125
-in sales revenue(250*10)	2500		-in sales revenue(125*30)	3750
Target profit volume:			Target profit volume:
-in units(1500+8000)/(10-4)=	1583		-in units(1500+8000)/(30-18)=	792
-in sales revenue	15833		-in sales revenue	23750
(1500+8000)/60%=			(1500+8000)/40%=

Jake's Pet Supplies
Pro Forma Contribution Margin Income Statement
For the month ending June 30
Monthly volume	200	100
	Product #1	Product #2	Total
Sales price	2000	3000	5000
Less: variable costs	800	1800	2600
Contribution Margin	1200	1200	2400
Less: Fixed costs			1500
Operating income			900
WACM % (2400/5000)			48%
Calculation of Weighted average CM per unit
	Product #1	Product #2	Total
CM/unit	6	12	18
Sales mix (# sold of each)	67%	33%	100%
Contribution margin	4	4	8
WACM/unit	4	4	8
Multiproduct Breakeven point:	Product #1	Product #2	Total
-in units 1500/8	125	63	188
Sales revenue at breakeven	1250	1875	3125
Multiproduct Target profit point:	Product #1	Product #2	Total
-in units (1500+8000)/8	792	396	1188
Sales revenue at target profit	7917	11875	19792
(* selling price/unit)
Margin of Safety (in $)	6667	10000	16667
(Actual sale-BES)
Margin of Safety % MOS/Actual sale)	84%	84%	84%
Operating Leverage Factor
Contn/Opg.Income	1.33	1.33	2.67
Expected % change in operating income (%)(OPL*5%)	6.67%	6.67%	13.33%