For years, Janet McFarland's friends and family raved about her homemade jellies and salsas. Janet traditionally canned several gallons of salsa, ladled it into decorative pint jars, wrapped them, and sent them as gifts. Her friends said, "You ought to sell this stuffyou'd make a fortune!" So, Janet decided to give it a try.

First, she decided to concentrate on one product, a green cactus salsa that had gotten rave reviews. She scouted sources of jars, lids, and labels. In addition, Janet got in touch with her local agricultural extension office and learned a considerable amount about laws regulating food sales. One source of surprise was that she was required to obtain an expert confirmation of the ingredients in her salsa.

Usually, Janet added a little of this and a little of that until it tasted right. She found out that this casual approach would not work. Foods were required to be labeled with the name of each ingredient in order of amount. Suddenly, it mattered whether ancho or poblano chilis were used and in what proportion. Janet needed a standardized recipe. She located a professional food chemist to analyze the recipe and certify the proportion of ingredients.

Janet traveled to a number of grocery stores and gift shops in the area. Several were willing to stock her product on consignment, placing a few jars by the cash register; others guaranteed shelf space but required a shelf charge for it. She figured that traveling to the stores, checking on sales and stock, and visiting prospective customers would take about one day a week. Before starting production, Janet consulted with her family accountant, Bob Ryan.

Janet outlined her business plan. Since her product was new on the market, she thought a price of $4.50 would be reasonable. Bob took the proposed price and the costs she had estimated, and did some quick break-even analysis. Then he looked up and gave Janet the bad news; at a price of $4.50 per jar, she would lose money. Even worse, increasing the quantity sold would just make the loss larger. As a friend and business advisor, Bob decided to help Janet reconsider her proposed methods of making the salsa, to see if the variable costs could be reduced. If she could not find a way to get her variable costs below price, her business could never succeed.

Questions

1. What kinds of variable and fixed costs do you think Janet will incur?
2. Given Bob's initial assessment that the variable costs are higher than the price, what is wrong with Janet's thought that selling more is the way to go?
3. How important is break-even analysis to a firm? Do you suppose that large companies do break-even analysis as well as small companies?
4. Why is the concept of breaking even important? Doesn't Janet want to make a profit?
5. Janet doesn't know what price to charge. How could she get a better idea?

Answer rating: 100% (QA)

1 Variable and Fixed Costs Variable costs are costs that vary with the level of production while fixed costs remain constant regardless of production ... View the full answer