Subscription Case Study

Problem $1$: Break$-$Even Analysis

Imagine you are running a new business that sells monthly subscription boxes filled with $[$trendy$,$ cruelty$-$

free makeup products aimed at teenagers$].$ The goal of this exercise is to analyze the break$-$even point,

cash flow, and financial projections for your business.

Key Information:

Selling Price per Subscription Box: $$30\mathrm{.}00$

Cost of Goods Sold $($COGS$)$: $$12\mathrm{.}00$ per box $($This includes makeup products, packaging, and shipping

costs$).$

Assume that there are only material costs associated with the Cost of Goods Sold $($COGS$)$ That is$,$ there is no

labor or other direct items associated with the manufacture of the product. For the purposes of this

exercise, I have classified direct labor in fixed costs.

Fixed Costs $($Salaries$,$ Influencer Marketing, Rent, Overhead$)$: $$70,000/$month

Equipment Cost for Packaging: $$120,000($Straight$-$line depreciation over $5$ years$)$

$($Assume machinery and equipment is on books at $$120,000$ as of Jan. $1$ with a $5-$year useful life. For ease of

calculation you can assume straight$-$line depreciation. You can assume it was an equity contribution made

by the founder$)$

Question Set $1$:

Calculate Monthly Profit Break$-$Even Revenue and Quantity:

a$.$ Use both the "total revenue $-$ total cost" and the "fixed cost$/$contribution margin" approaches.

b$.$ Show your work using the two approaches.

Calculate Monthly Cash Break$-$Even Revenue and Quantity:

Problem $2$: Cash Flow & Income

Assume that the selling price, COGS, fixed costs, equipment, and depreciation are the same as in Problem $1,$

but with the following additional information:

$1.$ To launch, you must maintain a buffer of one month$$s worth of subscription boxes on hand at all

times. Since you begin on Jan $1,$ you need to order $2$ months' worth of inventory on Jan $1,$ which

you pay for on delivery.

$2.$ You estimate that the number of subscriptions you sell will be the same for January and February,

achieving the break$-$even quantity calculated in Problem $1$

$3.$ You ship boxes throughout the month, and customers are billed immediately upon shipment.

Question Set $2$:

$1.$ Calculate Your Cash Position at the End of January:

a$.$ Consider initial inventory purchases and subscription payments.

b$.$ Factor in depreciation, fixed costs, and upfront marketing expenses.

$2.$ Develop an Income Statement for January.

$3.$ Calculate the Difference Between January Cash Generation$/$Use vs$.$ Profits.

Note: For Question Sets $2$ and $3,$ negative balances in any asset accounts are acceptable.

Problem $3$: Cash Flow with $30-$Day Payment Delay

Assume all of the cost and expense assumptions remain as in Problem $2,$ but you$$ve been granted $30-$day

terms with your suppliers, and customers are billed $30$ days after receiving their first box.

Specific Scenario:

$$ Payment for materials is made $30$ days after receipt.

$$ Customers pay for their subscription $30$ days after receiving the box.

Business Sequence:

Events in January

$$ Jan $1$: Order $2$ months' worth of inventory.

$$ Jan $2$: Goods are received; payment is due on Feb $2$nd

$.$

$$ Throughout January: Ship the subscription boxes to reach break$-$even. Customers will pay in February at

the end of their $30-$day trial.

Events in February

$$ Feb $1$: Order $1$ month$$s worth of inventory to replenish January shipments.

$$ Feb $2$: Receive goods; payment due on March $2$ nd

$.$

$$ Feb $15$: Receive payment for January shipments.

$$ Throughout February: Ship boxes to maintain the break$-$even number of subscribers.

Events in March

$$ Mar $1$: Order $1$ month$$s worth of inventory to replenish February shipments.

$$ Mar $2$: Receive goods; payment due on April $2$nd

$.$

$$ Mar $15$: Receive payment for February shipments.

$$ Throughout March: Ship boxes to maintain the break$-$even number of subscribers.

Events in April

$$ Apr $1$: Order $1$ month$$s worth of inventory to replenish March shipments.

$$ Apr $2$: Receive goods; payment due on May $2$ nd

$.$

$$ Apr $15$: Receive payment for March shipments.

$$ Throughout April: Ship boxes to maintain the break$-$even number of subscribers.

Question Set $3$:

$1.$ Develop a monthly Income Statement as of the end of each month $($January through April$)$

$2.$ Calculate your cash generation$/$usage for each month

$3.$ Develop an ending balance sheet for each month $($Assets: Cash, AR$,$ Inventory, Machinery. Liabilities:

AP$,$ Net Worth: Assets $$ Liabilities$)$

$4.$ Report on your cumulative cash generation$/$usage at the end of each month

$5.$ Report on your total profit for the entire$-4-$month period