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TANSTAAFL

Let's Launch A Business

Who Are These Companies?

Truth In Advertising

Company:TANSTAAFL ="There Ain't No Such Thing As A Free Lunch" (REALITY)

Manufacturer:WAC ="We Are Cheap" (TRUTH)

Broker: AA-YSR="Ask And - You Shall Receive" (SERVICE)

Retailer:WAIJA ="We Are Incredible Just Ask" (BET ON IT)

Big Picture - An Opportunity For TANSTAAFL...

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 fulltime

"AA-YSR" Broker Opportunity... a large broker of educational toys named "AA YSR" approached TANSTAAFL andexpressedinterestinrepresentingTANSTAAFL;they specificallybelievethattheycanobtaindistribution in a major retailer named "WAIJA" if the price point isattractive.

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

What AA-YSR Shared...

1.BrokerMark-Up...theyrequire("workon")10%mark-uptotheretailerwithallvendorstheyrepresent;this is for account management (selling activity). They do not warehouse the product; they do not manage the accountsreceivable.

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 promotionalperiods.

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 promotionalperiod.

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 forone

year.

Helpful Hint: "Yellow" Are "CASE FACTS" - Remainder Needs Your Critical Thinking What's The Math? At Everyday At At Some Detail Price Promotion Weighted Price Avg. Price WAUA Required Margin Mix %% Mix Of Total WAIJA Business WADA Discount To Consumer Mix % Sell Price To Consumer Mix % WAUA Gross Profit Sell Price To WAIJA WADA Mark-Up % AA-YSR Required Mark-Up Sell Price To AA-YSR AA-YSR Gross Profit AA-YSR Margin % TANSTAAFL Product Cost/ Unit TANSTAAFL Incr. Shipping/Unit TANSTAAFL CGS TANSTAAFL Gross Profit/ Unit TANSTAAFL Margin TANSTAAFL Mark-Up % QUESTION 1 - TANSTAAFL Break Even Units QUESTION 1 - TANSTAAFL Break Even Dollars Project Business Projected CGS Projected Gross Profit Annual Expense (Fixed Cost) QUESTION 2 TANSTAFFL Projected Profit QUESTION 3 TANSTAFFL OPTIONS - INCLUDE? Math - Your OptionsWhat TANSTAFFL A. Cost Of Goods... they've gotten three quotes from reputable vendors to produce and package theeducational Believes... software. The lowest cost was from a vendor named "WAC" Assumptions About The Quantity - Units "WAC" Pricing Business 10,000 $100 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 SO Professional Fees (Incorporate; Legal; Etc.) $5,000 Total Estimated Expenses (Fixed Costs] $50,000 Estimated Incremental Shipping Cost/Unit 50.50 Life Is Great... The three partners are ECSTATIC They have a likely order for 10,000 units. The everyday retail selling price is $9.99 TANSTAFFL Is On It's and their cost from the manufacturer for production including packaging and delivered to their warehouse is ONLY Way! $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? 31 Options.. what would you do