You volunteer at the local Small Business Development Center (SBDC). Sophia is an aspiring entrepreneur who makes
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Question:
You volunteer at the local Small Business Development Center (SBDC). Sophia is an aspiring entrepreneur who makes customized footwear called Flippy-Flops (FF). She has an upcoming meeting scheduled with a local bank. She’d like to expand and needs cash to do it. Sophia would like to ask the bank for a $2,500 loan to increase production capability. While Sophia knows a lot about the design decorating the product, she’s like most new entrepreneurs: a bit disorganized and not very knowledgeable about accounting. That’s why she’s meeting with you at the SBDC.
From your conversation with her, you obtain the following information:
- Start-up costs were $1,000: sewing machine ($500), decorative supplies ($300), professional grade glue gun ($100), and 100 pairs of plain flip flops ($1/pair).
- Due to the seasonal nature of demand, Sophia likes to have approximately 20 decorated pairs in inventory, in order to meet “rush” orders.
- FFs are customized flip-flops, sold online. They have been relatively popular with $10,000 sales last past year.
- Sophia estimates sales will grow by 8% this year.
- The average selling price per pair is $10. The low frill pairs sell for $8 (Number of units is approximately 25% of pairs sold). Highly decorated pairs sell for $20 (number of units is also approximately 25% of pairs sold).
- Cost of materials for embellishing and customizing the flip-flops range from $2.50 - $8.00 per pair.
- Sophia estimates it takes her 30-90 minutes (.5 - 1.5 hours) to decorate one pair, depending on the complexity of the design. She isn't sure what value to assign to an hour of her labor.
- Shipping is paid for by the customer, if needed.
- Transactions are PayPal only.
- The website and PayPal fees are $100 per month.
- Taxes have not been filed since Sophia started this as a hobby.
- What is the Contribution Margin per unit (consider the differences between low-frill and highly decorated pairs)?
- What is the breakeven in units – assuming all the FFs are the same? Be sure to include assumptions you’ve made in the analysis.
- What is the multi-product breakeven in units? Be sure to include assumptions you’ve made in the analysis.
- How does sales mix affect the breakeven numbers?
- Is the business profitable?
- What’s the income projection for next year?
- Can the business afford to take on a loan?
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