Two college students have come up with the same idea at the same time, and because they are unable to decide who should be CEO, they go into head-to-head competition. They do, however, build their business models quite differently.

Elsa decides to hire assembly workers on payroll; Anna decides to outsource her assembly to a contract manufacturer which charges a fixed amount per piece manufactured.

Here are the characteristics of each business:

Elsas cost structure

Material costs	$5/unit
Salaries	$13,000 per month
Rent	$36,000 per year
Advertising	$3,000 per month
Admin Expenses	$1,000 per month

Annas cost structure

Material costs	$5/unit
Contract Manufacturer Costs	$10/unit
Salaries	$24,000 per year
Rent	$1,000 per month
Advertising	$3,000 per month
Admin Expenses	$1,000 per month

Both companies can sell their products for $25 each as they are essentially the same!

Questions:

6. Now, assume that each company can sell 4,000 units in the first month. What is the operating profit for Elsa's company that month (before taxes, etc.)?

7. Now, assume that each company can sell 4,000 units in the first month. What is the operating profit for Anna's company that month (before taxes, etc.)?

8. Using the concepts we have discussed in class, how would you describe the key difference in the financial business model between Elsa and Anna's businesses?