Question
Hersh Backpack Company is a small business that is planned to be located in a small Prince Edward Island town. The town was incorporated in
Hersh Backpack Company is a small business that is planned to be located in a small Prince Edward
Island town. The town was incorporated in 1885 and, like many communities in the area, it prides itself
on being able to offer a unique quality of life to its citizens. Much of its history recognizes the
importance of individuals, family, and community. The town's council has emphasized attracting small
businesses to the area based on its quality of life.
Sam, the owner of Hersh Backpack Company, believes that there is a market for backpacks bags in the town
and surrounding area. Sam just received her degree in design from Alberta University and thought
about starting the business during the last year of her academic program. Sam believes that her unique
approach to design and her use of environmentally friendly materials in the production of the Backpack
will attract potential customers. Her assessment of the market demand included a phone survey of a
random sampling of town residents, an analysis of population data retrieved from the Statistics Canada
website, and an assessment of the availability of competitive products in the town and surrounding area.
Following her market assessment, Sam incorporated with the intention of opening a storefront on July
1, 2020, on the town's main street, where she would manufacture and sell a variety of Backpacks, from diaper
Backpacks to evening bags.
All materials will be sourced from local suppliers and the manufacturing will be
done by Sam.
Although Backpacks represent a difficult market to enter, Sam expects sales to be reasonably strong.
She spent the last few months working on a business plan and she has considered various aspects of her
business model. Backpacks sales are anticipated to come from the internet (15%), mail orders over the
phone (15%), and walk-ins to the store (70%).
All online and mail-order sales are to be paid by credit
card and the in-store sales are anticipated to be paid by cash (10%), debit card (30%), and credit card
(60%). Sam has made an arrangement with a local financial institution such that the debit processing
will be done the same day but the credit card processing will be done on the last day of the month for
the entire month's credit card sales.
The cost of credit card processing is a fee of 5% of the total amount
processed, while the debit card processing is covered by her monthly business banking fees.
The manufacturing process takes approximately two months. To take advantage of the fabric and
material purchase discounts, Sam plans to buy the material for the year in January and February (50%
in each month) and she will do all the manufacturing herself.
Because Sam will be buying material in July for 2020, she will need to purchase and pay for all the material at once to get the discount. The cost
of the materials will vary depending on the type of Backpack, with costs approximating $20, $10, $10, and $50 per Backpack for diapers, shopping, school, and evening Backpacks respectively; the cost includes the discount for buying in January and February. Sam has already contributed $1,000 in cash when incorporating the business; therefore, she expects to have access to the $1,000 in cash that she contributed and a $10,000
line of credit (5% annual interest cost) that she has already secured from her financial institution and from which she can borrow in $1,000 increments. The anticipated sales price, volume, and pattern are presented in Exhibit 1 and the expected monthly expenses are presented in Exhibit 2; monthly expenses
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