4) Calculation Question

Patricia has decided to convert her passion for scrapbooking into a business venture. Scrapbooking is where you make a creative book of personal memories. She is going to call her business 'Scrap It'. She is excited to take this opportunity to a new level. She has a couple of options to consider. One option is to open up a storefront and have people come in to buy the supplies and create their own scrapbooks. The other option is to provide an online store and not a have physical store. People can order the materials and then Patricia can ship the items to the customer, with instructions, and the customer can build their own scrapbook. She needs your help figuring out how many blank scrapbooks plus related supplies she needs to sell in order to make the business worthwhile (actually make a profit). The sale of a scrapbook includes the blank scrapbook plus enough supplies to embellish the scrapbook the way the customer wants (called a scrapbook kit). For the storefront option, the rent will be $800 a month with additional costs of (liability plus fire) insurance for $600 a year and average total utilities cost of $100 a month. Her advertising costs, she estimates, will be $50 a month (for (posters and flyers in local papers). She would like to charge $50 per scrapbook kit, which will include a fancy blank scrapbook, 5 sheets of themed stickers, one special scrapbook glue in a spill-proof bottle, special scrapbook tape, and a special box that contains everything. Patricia has figured it will cost her $10 for each fancy scrapbook, $1 for each sheet of themed stickers, $5 for each bottle of scrapbook glue, and $10 for the tape plus fancy box to put everything in. For the online option, she found it is going to cost her $3600 for the initial design and to build her website, which includes all maintenance. She is hoping to break even within one year, so she wants you to figure this cost into her first year of operation. The website company also charges her $50 per month to cover her internet and insurance on the website. To gain more traction on the social platform, she will incur $100 a month for advertising. She will still charge each customer $50 for each scrapbook kit and the cost of supplies for each scrapbook will remain the same as in b). She decided she is going to allow 'Free Shipping' to her customers, and she estimates it will cost her an additional $10 per kit she sends off.

Based on this information, describe:

a) What is break-even analysis and what it is used for. Include the formula for calculating the break-even point in units.

b) What is the break-even point (in the appropriate units) for the storefront? Show all calculations and assumptions.

c) What is the break-even point (in the appropriate units) for the online business? Show all calculations and assumptions.

d) Based on your results, which is the better option for Patricia to consider and why?

e) What other options could she consider? Please explain.