Larry and Janice Martin have decided, after 20 years of working for others, that they want to open their own business. CompuTech would be a repair and sales shop in the Kitchener area. Between the two of them, they thought that their experience in sales and service, along with their passion to strike out on their own, would serve as a great base.

As they prepared their Business Plan and the related financial projections, they knew that there would be many decisions that they would need to consider. This was to be important not only as they were sketching out their plan, but also once the business started operating.

In their research, they approached several small business consultants at local banks and with the local small business office of the local government. They were reminded that they needed a unique offering and successful day-to-day management. Beyond planning, operating, and organizing they would need to operate their business and make decisions based on results. To ensure this, they needed the ability to read financial statements and analyze the results of their decisions before considering the next steps.

Larry and Janice intend to invest $250,000 in the business. Their financial projections show that during the first year of operations, their business could generate $40,000 in profits (subsequent years could grow well beyond this level). The couple can borrow $125,000 from the bank (6%), and they can use $125,000 of their savings (consider this "equity"), a 7% return.

Q1: Given a 40% tax rate, what is CompuTech's projected return on investment in year 1? What is their weighted cost of capital? Use the template from our in-class activity. 

Q2: Should the couple launch their business based on your answer to Q1? Why or why not? ( use abbreviated terms ROI and WACC) 

The Martins will use a projected Income Statement to plan their operations:

Raw Materials Purchases: $200,000 Sales Salaries: 80,000

Advertising: 3,000 Travel: 5,000

Revenue: 400,000 Financing Costs: 7,500

Office Lease: 5,000 Depreciation: 15,000

Income Taxes: 4,500 Admin Salary: 40,000

Use these accounts to prepare CompuTech's Income Statement for the year ended December 31, 2021.

Profit decisions are important to the Martins. These decisions arise from understanding the market, pricing policies, and margins. The managers need to understand the appropriate tools and elements as they target profit levels and their ability to manage the elements of the profit calculation. For example, if CompuTech is operating at a loss or below break-even, then must understand how it can manage costs or volumes to generate profits. Break-even analysis can help the Martins and CompuTech decide how many 'packages' they need to sell, what price should they sell at, fixed cost levels, and what product or service they should promote.

Given the following:

CompuTech's products are sold for $100 per 'package'

CompuTech's products cost $50 per 'package'

Fixed Costs are determined by the Income Statement

Q1: Create a CVP sheet and table to reflect the information (copy & paste Module 2 work). 

Q2: What is the break-even in units for CompuTech in 2021? Use cell referencing. 

Q3: In the same Excel sheet, we need a separate CVP data sheet and CVP table to answer the following question (use cell referencing):

The variable cost of materials rose by 10% during the year, and CompuTech plans to hire a Sheridan student (the annual cost for Part-Time service is $30,000 per year) to help CompuTech's marketing. How does the variable cost increase and hire impact CompuTech's break-even?

Answer rating: 100% (QA)

To answer your questions well go through each part step by step Q1 Given a 40 tax rate what is CompuTechs projected return on investment in year 1 What is their weighted cost of capital To calculate t... View the full answer