You volunteer at the local Small Business Development Center (SBDC). Sophia is an aspiring entrepreneur who makes customized footwear called Flippy-Flops (FF). She has an upcoming meeting scheduled with a local bank. She’d like to expand and needs cash to do it. Sophia would like to ask the bank for a $2,500 loan to increase production capability. While Sophia knows a lot about the design decorating the product, she’s like most new entrepreneurs: a bit disorganized and not very knowledgeable about accounting. That’s why she’s meeting with you at the SBDC.

From your conversation with her, you obtain the following information:

• Start-up costs were $1,000: sewing machine ($500), decorative supplies ($300), professional grade glue gun ($100), and 100 pairs of plain flip flops ($1/pair).
• Due to the seasonal nature of demand, Sophia likes to have approximately 20 decorated pairs in inventory, in order to meet “rush” orders.
• FFs are customized flip-flops, sold online. They have been relatively popular with $10,000 sales last past year.
• Sophia estimates sales will grow by 8% this year.
• The average selling price per pair is $10. The low frill pairs sell for $8 (Number of units is approximately 25% of pairs sold). Highly decorated pairs sell for $20 (number of units is also approximately 25% of pairs sold).
• Cost of materials for embellishing and customizing the flip-flops range from $2.50 - $8.00 per pair.
• Sophia estimates it takes her 30-90 minutes (.5 - 1.5 hours) to decorate one pair, depending on the complexity of the design. She isn't sure what value to assign to an hour of her labor.
• Shipping is paid for by the customer, if needed.
• Transactions are PayPal only.
• The website and PayPal fees are $100 per month.
• Taxes have not been filed since Sophia started this as a hobby.

1. What is the Contribution Margin per unit (consider the differences between low-frill and highly decorated pairs)?
2. What is the breakeven in units – assuming all the FFs are the same? Be sure to include assumptions you’ve made in the analysis.
3. What is the multi-product breakeven in units? Be sure to include assumptions you’ve made in the analysis.
4. How does sales mix affect the breakeven numbers?
5. Is the business profitable?
6. What’s the income projection for next year?
7. Can the business afford to take on a loan?