Question

CVP Problem

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.

**Tax Rate 35%

Directions:

1a) Complete the input area with the product and cost assumptions.

1b) Build a model to calculate the breakeven for each product separately, both in units and dollars (make the assumption that the other product does not exist).

1c) Create a proforma income statment with a column for each product and a total column. Product columns should include revenue, variable costs, and contribution margin. The total column will show the fixed costs, operating income, taxes, and net income. Base this statement on the original product assumptions.

Answer 1

1.a.

	Launch-it	Treat-Time
Selling Price	10	30
Variable Costs:
Cost of goods	1	7
Shipping	2	8
Commission	1	3
Total Variable cost	4	18
Fixed Costs:
Salary			1000
Entry fee			500

1.b.

Break-even point for Launch-in
Unit Selling Price	$10
Unit variablce cost	$4
Unit contribution margin	$6.00
Fixed expenses	$1,500
Break-even in units(1,500/ 6.00)	250
Break-even in dollars(250 x 10)	$2,500
Break-even point for Treat-Time
Unit Selling Price	$30
Unit variablce cost	$18
Unit contribution margin	$12.00
Fixed expenses	$1,500
Break-even in units(1,500/ 12)	125
Break-even in dollars(125 x 30)	$3,750

1.c.

Income statement for the first month of operations
	Launch-it		Treat-Time		Total
Unit Sales	200		100
	Per Unit	Total	Per Unit	Total
Selling Price	$10	$2,000	$30	$3,000	$5,000
Variable Costs:
Cost of goods	$1	$200	$7	$700	$900
Shipping	$2	$400	$8	$800	$1,200
Commission	$1	$200	$3	$300	$500
Total Variable cost	$4	$800	$18	$1,800	$2,600
Contribution Margin		$1,200		$1,200	$2,400
Fixed Expenses
Salary					$1,000
Entry fee					$500
Total Fixed Expenses					$1,500
Net operating income					$900

Income tax $315

Net income $585