MODULE 3:

Profit decisions are important to the Martins. These decisions not only arise from understanding the market, pricing policies and margins the managers need to understand the tools and elements they need to consider as they target either profit levels or their ability to manage the elements of the profit calculation. For example, if CompuTech is operating at a loss or below BREAK EVEN then understanding how they might be able to manage costs, or volumes to generate profits becomes very important. BREAKEVEN analysis can help the Martins and CompuTech decide on any of the following: how many units they need to sell, what price should they sell at (and compared to what the market will bear), what levels their fixed costs are at, what product or service should a company promote more or less.

Assuming the following: (i) the sales price for each CompuTech product sold is $50; (ii) each product sold costs $25 in Raw Material components; and the business Fixed Cost is as determined in your Income Statement.

Q1: What is the BE in units for CompuTech in 2021?

Q2: What impact would occur to the BE if the variable cost of materials rose by 10% during the year?

Q3: If the overall market for computer products in CompuTechs market area is 3,000 units what share of the market does its BE (Q1) represent? What share of the market does CompuTechs unit sales in 2021 represent?

Q4: If CompuTech were to hire a Sheridan student (annual cost for Part Time service $20,000 per year) to help in the marketing of CompuTech, what would the impact be on the companys BE?

Q5: If the Sheridan student could impact unit sales by 20% growth, would their hiring be justified? Explain.

Q6: With the following information for 2022 prepare a pro-forma Income Statement for the year ending December 31, 2022, and then, calculate CompuTechs (a) income before taxes, (b) contribution margin and (c) PV ratio.

RM Purchases: $205,000

Freight In: 4,000

Sales Salaries: 60,000

Commissions: 3,000

Travel: 3,000

Advertising: 5,000

Admin Salaries: 38,000

Revenue: 420,000

Depreciation: 40,000

Office leasing: 7,000

Finance Costs: 14,000

Income Taxes: 13,000

Q7: Assuming that the price per unit and the variable cost per unit have stayed the same as in calculations for 2021, what is the new BE in units for CompuTech in 2022? How does this compare to the BE in units for the previous year?

Q8: If the total market in the CompuTech market area had experienced a shrinking in units during the year (of 10%) should the Martins be concerned? Explain.

By 2023 the Martins are projecting considerable improvement in their business. Using the following accounts prepare the Income Statement for the period ending December 31, 2022.

RM Purchases: $406,000

Sales Salaries: 80,000

Commissions: 5,000

Travel: 5,000

Advertising: 10,000

Depreciation: 80,000

Admin Salaries: 60,000

Office Leasing: 10,000

Finance Costs: 30,000

Income Taxes: 42,000

Q9: In a single EXCEL file complete a file displaying the three Income Statements that you have completed so far. Leave two blank columns between each year so that later we can do account changes between years.

MODULE 7:

It is 2022 and CompuTech has decided to expand its business. They have the choice of taking out a competitor in their community and expanding their market presence or they can open a second business which is a franchise opportunity.

In the first option the takeover cost would be $300,000 and would result in net cash flow of $60,000 per year beginning in the second year of ownership. No net cash flow is expected in the first year as takeover expenses would offset any proceeds. It is estimated that the business begins acquired could have a residual value of $200,000 in the 10th year.

This second option involves franchising at a cost of $75,000 per year with the potential to bring in $100,000 of net profits in each year, beginning in year 2. No proceeds are forecast in year 1. The franchise would run for only 8 years.

Q1: If the CompuTech cost of capital is 7% which of the options available to the Martins would you recommend? Remember to do an NPV calculation, a Payback calculation, and an IRR calculation to support your answer.

REFLECTION:

What learnings have you experienced as you investigated the Martins story? What issues did you recognize as they considered firstly launching the business, and secondly in handling expansion?