Break Even And Target Analysis

Question Description

1. Create your own original EXCEL file with price and cost data from the case, separately showing all variable cost items all fixed cost items, and the client’s current price per UNIT and number of UNITS sold. (10 points to fully meet requirements)

2. In the same Excel file, create a contribution income statement, using the format in the case, (i.e., showing price x units sold (revenue), variable costs x units sold (total variable costs), contribution per unit and total contribution; total fixed costs. income before and after tax. (10 points to fully meet requirements)

3. Calculate break even units at current price (10 points to fully meet requirements)

4. Calculate the revenue required to meet income target after tax (profit) (10 points to fully meet requirements)

5. First decision: Raise price? Calculate the price per unit needed to reach the required income target (keeping the current volume of units sold). Explain why this might or might not be a good choice. (10 points to fully meet requirements; 2 extra points possible for exceptional quality of explanation/rationale/format)

6. Second decision: Increase volume? Calculate the units to be sold (volume) under current pricing in order to reach target income. Explain why this might or might not be a good choice. (10 points to fully meet requirements; 2 extra points possible only for exceptional quality of explanation/rationale/format)

7. Determine whether it is best to adjust price or volume in order to reach the client’s target income Compare the options and explain the rationale for your choice (10 points to fully meet requirements; 3 extra points possible only for exceptional quality of explanation/rationale/format)

Tiffany Hopkinson established and ran a small workshop that manufactured original design quality jewelry. What began as a hobby for sale in craft shows grew into a small on-line business. Later, it became a manufacturer for upscale jewelry shops in tourist locations across the country. To accommodate the greater volume, Ms. Hopkinson opened a small workshop in the historic district of Stinson Beach, California, about 25 miles north of San Francisco. She paid the following prices for some of her raw material: Gold $1,380 per ounce, Silver $17.25 per ounce. Gold and Silver prices have been volatile making pricing difficult.

She marketed these creations to gift shops across the United States in batches of 30 assorted items, for which she charged $4,995 per batch. In turn, the gift shop sold the jewelry at prices averaging eight times what they paid for the jewelry.

Tiffany had a staff of 36. 33 workers produced the jewelry. Three workers helped with shipping and cleanup. The production people were paid $35 per hour including benefits. The shipping and cleanup workers were paid $21 per hour for their unskilled labor. Jewelry production varied between a low of 34 and a high of 46 batches per week, and averaged 2,000 batches per year. Each batch cost $220 (excluding wages) to pack, ship and insure. It takes 2 hours to pack and ship one batch. The shipping and clean up staff members, each work 50 weeks per year for 30 hours per week. They received no benefits beyond the employers’ portion of FICA which was included in the $21.

As she expanded Tiffany found it necessary to hire an outside accountant to handle payroll, taxes, and to keep the books. This cost $65,000 per year. She also engaged a production manager for $115,000 per year including benefits.

Tiffany spends 20 weeks a year touring the U.S. She attends trade shows in order to sell her jewelry, and to find suppliers of the components for her products. Her travel, hotel, show fees, and food costs were $6,800 each week. Workshop rent and utilities cost her an average of $17,500 per month. Insurance including liability, workers compensation, and unemployment cost $11,500 per month. Advertising in trade journals and on Fashionista.com cost $88,000 per year.

Tiffany works 30 weeks a year at designing jewelry, often working over 50 hours per week. She spends 20 weeks marketing and takes 2 weeks of vacation.

The cost of raw materials averaged $3,100 per batch. It takes 33 hours of labor per batch to manufacture the jewelry. Tiffany does design work and creates the molds for the jewelry.

Business was brisk, and Tiffany could easily sell every batch that she produced. But she found herself earning too little money. After paying her 53% income, social security and Medicare taxes to the US and California, she found herself with almost no money to live on. That led her to ask for your help.

She complained to you that she worked very hard, 50 weeks a year, but ended up almost broke and frustrated. Tiffany said that Stinson Beach was expensive even though home prices were about half of what they were in San Francisco, some 25 miles to the south. Reasonable homes sold for $1,200,000 to $2,500,000. These were about 9 times the price of homes in Wilmot, New Hampshire where her sister lived. With property taxes and insurance, Tiffany thought that she needed at least $12,400 per month for her mortgage payment. That payment was far beyond what she can afford. She would need $25,000 per month after tax to afford the mortgage and have enough left for a moderate lifestyle.

You agreed to analyze her business operations and to advise her how to reach her goal of earning $300,000 per year, after taxes.

After some calculation and some thought, you conclude that Tiffany has to increase her revenues, perhaps by achieving greater volume, or perhaps by raising her selling price. Write a short report directed to Ms. Tiffany Hopkinson with your recommendation on how to increase revenue, supported with a pro-forma contribution income statement which incorporates your recommendations. You should show all calculations in a Microsoft Excel document. Include a breakeven analysis for zero profit and a second analysis to achieve an after tax target income of $300,000 for Ms. Nadeau and provide your conclusion. The report to Ms. Hopkinson can be written in a Textbox. Textboxes automatically wrap text in a separate worksheet in the same Excel document.

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