At one time during your MBA degree, you had the misfortunate of having the worst, ugliest, and meanest instructor in your entire education experience instruct you in managerial accounting. The instructor told you that he was born and raised on the island of Confused Oz that was a state of the country of Top-To-Bottom Ladder.
The instructor from Confused Oz Island told you the history of his place of birth and how all the people from that state were quite strange growing two heads and 12 toes. He also told you how they always walked backwards as they did not have a great sense of direction. He stated that when local inhabitants of the island left to visit other parts of the world the additional head was removed by storage, placed in cryogenics, and then re- attached when the inhabitant returned.
Whilst the thought of such a horrible place scared you, it still pricked your interest. Years later you decided to take a trip to see if the stories told by the ugly, mean, and terrible managerial accounting instructor was true. After arriving in the capital of Confused Oz

Island you were stunned to realize that the stories were true. The local inhabitants did have two heads, were extremely ugly, and generally always walked backwards.
After watching and mixing with the local inhabitants, you suddenly had an idea. How about developing and selling a mobility device that would help them walk forward.
Business Idea and Market Analysis
After returning to the UAE you began sketching out a draft of the mobility device you had in mind. After several design changes and refinement, you were confident you had developed an effective device that would help to improve the lifestyle of the people on Confused Oz Island.
You then conducted some market analysis. From Wikipedia, and other sources, you established the current population of the island was 2,400,000 individuals. The inhabitants of Confused Oz Island are the only known people on Earth found to grow two heads and walk backwards. After some deep thought you realize it may be a tough task to convince the inhabitants of Confused Oz Island to walk forward having perhaps become comfortable walking backwards. Nonetheless, you are confident that in the earlier stages of operations your will be able to target 2% of the total population daily convincing 1.0% of the local inhabitants of Confused Oz Island targeted to change the direction in which they walk. You are confident that the mobility device you intend to develop will be slightly sturdy; thus, a person is likely to purchase the device twice a year.
Operations and Costs in Year 1
Realizing the difficulty of selling the item in the first year of operations you project you will require a team of 20 hard core salespersons capable of pounding the ground and making concrete says. The annual salary of each salesperson will be $175,000. To aid in making sales you decide to enact an advertising campaign supported by marketing activities. After reviewing submitted tenders, you decide to you will pay Duffy Ears Advertising $450,000 for the entire year to conduct the advertising, and Flippers and Flats Marketing $275,000 for the full year to undertaking the marketing tasks.
To conduct your general administrative and sales operations, you elect to rent an office building agreeing to pay $50,000 per month. In addition, you agree to rent equipment for sales and administration paying $32,500 per month. Also, you agree to an annual internet and phone package with an international service provider to provide internet and telephone services. The annual cost of the services is $850,000.
To store the finished products, you elect to purchase a building for $12,000,000 that will be depreciated using the straight-line depreciation method over a period of 20 years with the building assumed to have zero salvage value. Total electricity expenses for the year to operate the building is estimated to $180,000. The “friendly” financial accountant also informed you that in the first year the interest and principal costs will amount to $25,000.
To complete the extensive administrative load, you estimate you will need to employ 65 administrative workers with an annual salary of $85,000. To ensure the administrative staff are continuously up to date, you estimate training expenses will amount to $120,000 and another $45,000 of miscellaneous costs.

Based on your final designs you estimate that the direct material costs to manufacture a single unit is $50.50 with direct labour per unit being $73.87. Indirect manufacturing costs for material is $6.90 per unit and $34.56 for indirect labour. The “friendly” management accountant estimated in the first year the applied manufacturing overhead would be $31.18 per unit.
Sales Price Policy
You are not quite certain the precise price to sell each unit. If you use a margin percentage approach you would apply a margin of 35%. If adopting a mark-up approach, you would apply a mark-up of 50%. Alternative you are thinking of an arbitrary selling price of $320.00.
Assume in the first month of operations there will be 10,000 units/transactions.
Required:
Using the Financial Template (to be accessed and downloaded from LMS) evaluate and assess the case study to answer the following questions:
1. In the first year of operation, what is the estimated total units (unique transactions) the company will sell (conduct) in the year?
2. What are the total fixed costs? Variable costs? Breakeven price?
3. If the selling price is determined by using the margin percentage, what is the
selling price? If margin percentage increased to 45% what is the selling price?
4. If the selling price is determined by using the markup percentage, what is the selling price? If the mark-up percentage decreased to 40% what is the selling
price?
5. Assume selling price is based on the margin percentage of 35%. What is the
contribution margin? Break-even quantity? Break-even revenue? And, in which month will the company each break-even? If the margin percentage is increased to 48%, describe the impact on the break-even.
6. Assume all variable costs per unit will increase by 12%. Describe the change in contribution margin, break-even quantity, and the month the company will break- even.
7. Assume that variable costs did not increase by 12%. However, all fixed costs increased by 15%. Describe the change in contribution margin, break-even quantity, and the month the company will break-even.
8. Assume no price increases in variable or fixed cost. However, assume selling price is determined by the mark-up percentage of 37%. What is the gross profit? Net profit? If mark-up percentage increases to 50% what is the impact on profitability?

Answer rating: 100% (QA)

1 In the first year of operation the estimated total units unique transactions the company will sell ... View the full answer