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:

9. If you are not confident about on your early sales projections so there's a chance you may miss on your first 3 to 6 months of sales, which of the following best describes the business model you would prefer and why?

a) Anna's, because her business model has lower fixed costs.

b) Anna's, because she has a lower contribution per unit.

c) Elsa's, because her business model has larger upside profit potential

d) Anna's, because her contract manufacturer is very efficient.

e) Elsa's, because her breakeven units are lower than Anna's.

f) There is not enough information provided to answer this question.

g) Elsa's, because she has a higher contribution per unit.

10. You have a table manufacturing business. You need to buy plywood in bundles of 10 sheets to keep the price lower. The plywood is used for the table top and various inner support pieces. In your unit economics analysis, which of the following would your purchase of the plywood be?

a) Scrap

b) Variable Cost

c) Primary Sunk Investment

d) Fixed Period Cost

e) Sunk Cost