An Overview

UINDY Students - Seniors... three friends came up with an idea for an interactive software involving a business educational simulation game for children ages 8 - 12; the product will be sold in the toy department. In this game, children are exposed to the basics of business. This insight is considered useful, regardless of what profession these children end up pursuing. It includes insight into drivers of business decisions. Their intention would be to run this business while they complete one more year of school; then they will decide if/who will join the business full time

"AA-YSR" Broker Opportunity... a large broker of educational toys named "AA YSR" approached TANSTAAFL and expressed interest in representing TANSTAAFL; they specifically believe that they can obtain distribution in a major retailer named "WAIJA" if the price point is attractive.

The Situation... the TANSTAAL team needs to gather information requested by the distributor and determine if they can justify borrowing money required from relatives and friends.

What AA-YSR Shared...

Requirements TANSTAFFL Has To Work With

1.Broker Mark-Up... they require ("work on") 10% mark-up to the retailer with all vendors they represent; this is for account management (selling activity). They do not warehouse the product; they do not manage the accounts receivable.

2.Retailer Margin... the mass retailers require a 35% margin on software in the toy department during non-promotional periods ("everyday"); they require a 25% margin during promotional periods.

3.Competitive Retail Price... the distributor knows that a price to the consumer of $9.99 will be required by the retailer.

4.Retailer Promotions... this product will be promoted for the winter holidays; they drop the retail price to the consumer by 20%; they require a promotional discount from the vendor to allow for a 25% retailer margin. The distributor estimates that 60% of the annual volume will be sold with during this promotional period.

5.Projected Volume... assuming that TANSTAAFL can meet the requirements above, AA-YSR believes the retailer will commit to first year annual business of 10,000 units - and will be "an exclusive" retailer for one year.

What TANSTAFFL Believes...

Assumptions About The Business

A.Cost Of Goods... they've gotten three quotes from reputable vendors to produce and package the educational software. The lowest cost was from a vendor named "WAC"

Quantity - Units

"WAC" Pricing

10,000

$1.00

Note: assume that to get these prices, TANSTAAFL must agree to an exclusive vendor agreement for the first year.

B.Family And Friends Loans... they can borrow whatever is needed - BUT - they must be able to pay it all back within a year. (In other words - they must demonstrate that they can at least break even in Year 1.)

C.Their Plans... continue school and work on the side to develop further products and prepare for year 2.

D.Cost Of Year One Operations... they would need to commit to one year with the following minimal expectations for this start-up company:

What's Needed

Annual Amount

Rent... office and warehouse

$15,000

Administration... take orders, etc.

$15,000

Warehouse Person... fulfill orders

$15,000

TANSTAAFL Owners Compensation

$0

Professional Fees (Incorporate; Legal; Etc.)

$5,000

Total Estimated Expenses (Fixed Costs)

$50,000

Estimated Incremental Shipping Cost/Unit

$0.50

Life Is Great...

TANSTAFFL Is On It's Way!

The three partners are ECSTATIC They have a likely order for 10,000 units. The everyday retail selling price is $9.99 and their cost from the manufacturer for production including packaging and delivered to their warehouse is ONLY $1.00! How can they miss??? That's $8.99 over the selling price to the consumer. They know they're going to be rich!

Questions?

1)Break-Even... how many units do they need to sell before they make money?

2)Profits... how much money will they make - with these assumptions?

3)Options... what would you do?