CASE 1: QUICK PHOTO LTD. Tony Kasabian was to present to a local banker for financing for his new venture, Quick Photo Ltd. The investment proposal contained a marketing plan designed to capture a good share of the southern Ontario digital print market. Tony was interested in buying several new to put the finishing touches on a business plan he wanted ready high-technology digital film printers manufactured in Japan and capable of providing online photo finishing and processing of top-quality prints from digital print processors in kiosks in several Ontario high-traffic malls, including locations in Don Mills, Ottawa, Windsor, London, and Kingston. He felt that his business concept was in line with the trend of developing high-quality photo finishing camera cards and CDs. His retailing plan consisted of operating digital services. However, he realized that his banker would be asking him many questions about market size, his competitors, his revenue targets for the next several years, and, most important, his marketing assumptions backing up his sales forecast. Therefore, before finalizing his business plan, Tony asked his friend, him calculate the number of prints that he would have to process each year to cover his fixed costs and earn a reasonable profit. On average, Tony figured sistent with competitors' charges for work of similar quality; most prints would be a recent commerce graduate, to help out that he would charge $0.32 per print, a price con- Profit Planning and Decision Making CHAPTER 5 14 4x 6 and some would be 5 X 7 or 8 X 10. Quick Photo's projected statement of 5,000,000 income for the first year of operations is as follows: $1,600,000 Number of prints developed Revenue $(250,000) (265,000) (78,000) Cost of sales Direct materials Direct labour Depreciation Supervision (80,000) (673,000) 927,000 Total cost of sales Gross profit Operating expenses Distribution costs (230,000) Salaries (110,000) Sales commission (25,000) Advertising (365,000) Subtotal Administration expenses (185,000) Salaries (20,000) Insurance (60,000) Rent Depreciation (33,000) Subtotal (298,000) Finance costs (35,000) Total (698,000) Profit before taxes 229,000) Income tax expense (101,000) $ 128,000) Profit for the year Questions 1. Calculate Tony's break-even point in revenue and the cash break-even point in revenue. 2. How many prints a year and what level of revenue must Tony reach if he wants to earn $275,000 in profit before taxes? 3. Calculate Tony's annual revenue break-even point by using the PV ratio if he is to meet the $275,000 profit before tax goal. 4. If he increases his advertising budget by $20,000, what would be Tony's new many additional prints must Tony develop to increase his revenue to cover the incremental advertising budget? yearly break-even point in prints and in revenue? How