Joe Davis is thinking about starting a company to produce carved wooden clocks. He loves making these clocks and sees it as an opportunity to be his own boss while making a living doing what he likes best.

Joe paid $300 for the plans for the first clock, and he has already purchased new equipment costing $2,000 to manufacture the clocks. He estimates that it will cost $30 in materials (wood, clock mechanism, and so on) to make each clock. If he decides to build clocks full time, he will need to rent office and manufacturing space, which he thinks would cost $2,500 per month for rent plus another $300 per month for various utility bills. Joe would perform all the manufacturing work and run the office himself, so he would like to pay himself a salary of $3,000 per month (enough to live on...). He plans to hire two sales-people at a base salary of $1,000 each per month plus a $7 per clock commission. This way, Joe would not have to take time away from manufacturing to sell the clocks.

Joe plans to sell each clock for $225. He believes that he can sell 300 clocks in December for Christmas, but he is not sure what the sales will be during the rest of the year. However, he is fairly sure that the clocks will be popular because he has been selling similar items as a side hustle for several years now. Overall, he is confident that he can pay all of his business costs, his salary of $3,000 per month, and have at least $4,000 of income (per month and ignoring taxes) that would stay within the business.

You're Job:

You've been hired as a financial analyst to evaluate Joe's situation. You must do the following:

1. Perform an analysis of Joe's financial situation to estimate the number of clocks Joe would need to sell each year for his business to be financially successful.

a. List all of the costs described and indicate whether each cost is i. Fixed cost ii. Variable cost iii. Mixed cost iv. Sunk cost (or not relevant)

b. Calculate the contribution margin per unit and the contribution margin ratio

c. Write down the total cost function for the clocks and calculate the annual breakeven amount in units and sales.

d. How many clocks would Joe need to sell annually to earn the Company's target income.

2. Identify uncertainties about the CVP calculations. Things to consider may include:

a. How did Joe come up with his estimates?

b. Will any cost amounts be different?

c. What costs (if any) were excluded from Joe's estimates.

d. What problems are there (if any) from Joe's revenue estimates.

e. Potential bias from Joe's perspective, your perspective, or anyone else's perspective.

3. How would the information you gathered from #2 above change or affect the breakeven analysis results?