Bill had done a market test of his Widget and it appeared there was solid demand if he priced it at $20 per unit, so he decided to launch his Widget business. Bill had two approaches in mind. First he could manufacture Widgets himself, or second he could arrange for contract manufacture. In both instances he planned to generate sales by networking on the Internet.  

As Bill gathered information on establishing his own manufacturing he found the following. Since the Widget was made of snap-together injection molded plastic parts he learned he could buy a reconditioned used plastic injection molding machine for $18,000.  For another $2,000 he could have a set of Widget molds made for the machine, which gave him equipment capacity for producing enough parts for 4,000 Widgets a week.  The plastic for each Widget would be about $1 per unit. With his savings and a modest loan from his parents Bill could handle these purchases and still have about a $15,000 reserve in his savings.  

In asking around Bill located a retired machine operator who was willing to work 40 hours a week for $15 an hour. In talking with this person he found the machine operator would actually have time to trim the injection molded parts and snap together 15 Widgets an hour. He also found he could obtain a machine maintenance service contract for $200 a month. Bill located a small space in an industrial park for his manufacturing operation which you could rent for $2,000 a month. He estimated his utilities would come to $400 a month.  

In investigating how to ship Widgets to customers Bill found he could get appropriate packaging material for $2 per Widget and that, on average, shipping and handling for each unit would be $3.  

Bill planned to quit his job and devote full time to his business. He planned to operate out of his small apartment and handle sales, marketing, Widget packaging, shipping, etc. Bill calculated that if he really cut back he could manage on $1,800 a month expenses which included his apartment rent. As he looked at his startup the final thing he needed was a much more powerful computer for internet marketing, sales, order processing and tracking, which he found he could lease for $200 a month.  

The second approach to his startup was to contract the manufacture and assembly of the Widgets rather than do his own manufacturing. In investigating this approach Bill found he could contract the manufacturing of the parts for $6per Widget and could contract assembly through Goodwill Industries for $4 per Widget.  

QUESTIONS:  (Show your calculations for each answer.)  

(Note - For the purposes of your calculations assume a 13 month accounting year, i.e., all months are 4 week months)   

 

If Bill decides to manufacture:  

 

1)  What are (list & total) his variable costs per Widget?  

 

b)  What are (list & total) his fixed expenses?  

 

c)  What is the marginal income (MI) per Widget?  

 

d)  As the business has been set up, what is Bill’s maximum output per month?  

 

e)  What monthly sales volume is needed to break even (B/E) each month?  

 

f)  If Bill reaches full output what would his monthly pre-tax profit be?  

 

If Bill decides to contract parts manufacture and Widget assembly:  

 

2)  What is Bill’s marginal income per Widget?  

 

b)  What are Bill’s fixed expenses?  

 

c)  How many unit sales per month are needed to break even?  

 

d)  What would Bill's pre-tax profits be at a volume equivalent to his maximum manufacturing output, i.e., the output answer to question #4.  

 

 

Bill’s self-manufacture sales plan (Rather than contract manufacture):  

 

Bill was fairly certain he could sell at least 100 Widgets in his first month of operation.  Further, once he got started he felt he could easily add an additional 100 Widgets to his sales each successive month thereafter.  

 

3)  According to Bill’s plan, what month will he break even? (Show all your calculations)  

 

b)  If Bill at least meets his sales plan as a minimum, will his start-up be OK?  

 

c)  If Bill’s sales don’t take off quite as fast as he expected and he had no sales in month #1, but then was on his plan thereafter, will his start-up be OK?  (Show your calculations.  

 

d)  Based on the expressed facts and your analysis of the case, what would you recommend Bill do and why?