Chapter 12: Relevant Costs 12.2 Jewel of the Nile Contributed by Frank Saccucci Instructor, MacEwan University, Edmonton Upon graduation from the Northern University School of Business, Janelle Kawapit launched an on-line jewellery business called Jewel of the Nile. In Janelle's last year of her business program, there was a manda- tory course called Small Business Management. One of the requirements in this course was a group assign- ment to build a business plan on any start-up venture. It was at this time that she convinced the other two group members, Kevin and Philippe, to build a business plan for an on-line jewellery business. Kevin, an accounting major, and Philippe, a marketing major, later became business partners when Jewel of the Nile was launched The three knew upfront that there wasn't anything unique about an on-line jewellery business and that their business could easily be another marble in the marblejar." The unique features they incorporated into the business plan and brought forward into the launch were as follows: 1. The jewellery would be designed by women for women. Women could submit their designs on-line according to a template design chart available on the Jewel of the Nile website. 2. The original designer would receive $10 for every piece sold on-line. 3. Jewel of the Nile would donate 10% of the selling price to charities providing services to women in need in less-developed countries. 4. The jewellery manufacturing will be done by qualified artisans and not mass-produced abroad. On average. Jewel of the Nile will be charged $50 per jewellery piece by the qualified craftsperson 5. For a personal touch, shipping would be from the artisan directly to the client. This would come at a $10 cost to Jewel of the Nile. The business was run out of one of the partners' 900-sq.ft. (83-m') condo, of which 90 sq.ft (8.3 m) was allocated to the jewellery business. Ten percent of the condo's annual carrying cost was expensed through Jewel of the Nile. The 10% of property tax, insurance, utilities, mortgage interest, and condo fees amounted to prepared by a public accountant for $1,000 a year, and there was $500 of amortization of laptop and printers. The three partners were feeling a bit discouraged after their first year of operation. With an average selle ing price of $109 per piece of jewellery, they just reached the break-even point. They realized that break-even represented only 20% of capacity. None of the partners drew a salary from Jewel of the Nile and therefore they still had to work at entry-level management positions. On top of that, each partner was devoting about 10 hours a week to the business. Just as they were about to give up, a jewellery design company called Carolina's Design and Fashion from Denmark contacted them and offered to purchase 400 pieces at $89 each. The pieces would be sold only in Denmark. If the order was accepted, the $10 fee for normal shipping would not apply and they would incur only a lump sum shipping cost of $800 to Denmark. The three partners met for coffee the following night to discuss the offer. Two of the partners were not excited about the offer given that they had just reached break- even and now were expected to give a large price discount on this volume purchase. They didn't know what to do and turned to you for help. Required Write a report to Janelle, Kevin, and Philippe advising them whether to take on the order from Denmark Before you tackle the question of what they should do, ask yourself what does 20% capacity represent in units and how much profit is to be made on the special order? Give thought to both analytical and qualitative information, such as the fact that no salary has been drawn to date. Canadian Managerial Accounting Cases EXHIBIT 1 - STATIC BUDGET VARIANCE REPORT Badet Actual Results Vrances 8,000 Static 64.000 Units produced and sold $1,152.000 $9.000 $1.056.000 (800 24.000 10000 334,000 Varle cost Direct tells Direct labour Variable manufacturing Other variable costs Contribution margin Fixed maturing costs Operating income 24,000 116900 $201.400 $ 3.500 EXHIBIT 2 - UNIT STANDARD COSTS Quantity Standard Price Standard Standard Price per Unit $16.50 Sales revenue Vare manufacturing costs Directe Direct labor Other variable mandataries Oshot 10 heunit $12.00 sh 5105 EXHIBIT 3 - UNIT ACTUAL COSTS Actuala Actual Price Actual Price per Unit $16.00 Sales seves Variable facturing costs Direct materials Direct labour Other variable m cturing it 04 b 08 51.00 $12.50/ht S1hr 53.00 $5.00 50 80 Chapter 12: Relevant Costs 12.2 Jewel of the Nile Contributed by Frank Saccucci Instructor, MacEwan University, Edmonton Upon graduation from the Northern University School of Business, Janelle Kawapit launched an on-line jewellery business called Jewel of the Nile. In Janelle's last year of her business program, there was a manda- tory course called Small Business Management. One of the requirements in this course was a group assign- ment to build a business plan on any start-up venture. It was at this time that she convinced the other two group members, Kevin and Philippe, to build a business plan for an on-line jewellery business. Kevin, an accounting major, and Philippe, a marketing major, later became business partners when Jewel of the Nile was launched The three knew upfront that there wasn't anything unique about an on-line jewellery business and that their business could easily be another marble in the marblejar." The unique features they incorporated into the business plan and brought forward into the launch were as follows: 1. The jewellery would be designed by women for women. Women could submit their designs on-line according to a template design chart available on the Jewel of the Nile website. 2. The original designer would receive $10 for every piece sold on-line. 3. Jewel of the Nile would donate 10% of the selling price to charities providing services to women in need in less-developed countries. 4. The jewellery manufacturing will be done by qualified artisans and not mass-produced abroad. On average. Jewel of the Nile will be charged $50 per jewellery piece by the qualified craftsperson 5. For a personal touch, shipping would be from the artisan directly to the client. This would come at a $10 cost to Jewel of the Nile. The business was run out of one of the partners' 900-sq.ft. (83-m') condo, of which 90 sq.ft (8.3 m) was allocated to the jewellery business. Ten percent of the condo's annual carrying cost was expensed through Jewel of the Nile. The 10% of property tax, insurance, utilities, mortgage interest, and condo fees amounted to prepared by a public accountant for $1,000 a year, and there was $500 of amortization of laptop and printers. The three partners were feeling a bit discouraged after their first year of operation. With an average selle ing price of $109 per piece of jewellery, they just reached the break-even point. They realized that break-even represented only 20% of capacity. None of the partners drew a salary from Jewel of the Nile and therefore they still had to work at entry-level management positions. On top of that, each partner was devoting about 10 hours a week to the business. Just as they were about to give up, a jewellery design company called Carolina's Design and Fashion from Denmark contacted them and offered to purchase 400 pieces at $89 each. The pieces would be sold only in Denmark. If the order was accepted, the $10 fee for normal shipping would not apply and they would incur only a lump sum shipping cost of $800 to Denmark. The three partners met for coffee the following night to discuss the offer. Two of the partners were not excited about the offer given that they had just reached break- even and now were expected to give a large price discount on this volume purchase. They didn't know what to do and turned to you for help. Required Write a report to Janelle, Kevin, and Philippe advising them whether to take on the order from Denmark Before you tackle the question of what they should do, ask yourself what does 20% capacity represent in units and how much profit is to be made on the special order? Give thought to both analytical and qualitative information, such as the fact that no salary has been drawn to date. Canadian Managerial Accounting Cases EXHIBIT 1 - STATIC BUDGET VARIANCE REPORT Badet Actual Results Vrances 8,000 Static 64.000 Units produced and sold $1,152.000 $9.000 $1.056.000 (800 24.000 10000 334,000 Varle cost Direct tells Direct labour Variable manufacturing Other variable costs Contribution margin Fixed maturing costs Operating income 24,000 116900 $201.400 $ 3.500 EXHIBIT 2 - UNIT STANDARD COSTS Quantity Standard Price Standard Standard Price per Unit $16.50 Sales revenue Vare manufacturing costs Directe Direct labor Other variable mandataries Oshot 10 heunit $12.00 sh 5105 EXHIBIT 3 - UNIT ACTUAL COSTS Actuala Actual Price Actual Price per Unit $16.00 Sales seves Variable facturing costs Direct materials Direct labour Other variable m cturing it 04 b 08 51.00 $12.50/ht S1hr 53.00 $5.00 50 80