Part 1: Cost structure: Audubon Advisors is a volunteer student organization that uses business skills theyve learned in their MBA program to advise local charity groups about business decisions. One charity group is planning to make and sell cutting boards at a major cooking show. The boards cost $6 each to make and will sell for $20 each. The boards will be made by volunteers at the show and all materials not used can be returned. That is, the group will make only the number of boards it can actually sell. The cooking show allows three options for groups selling at the show:

A. Pay a fixed booth fee of $5,600

B. Pay a fee of $3,800 plus 10% of all revenue from the boards sold at the show

C. Pay 25% of all revenues from boards sold at the show.

1. Compute the CM per board under each of the three options.

A. CM per board = Sell Price - Variable Cost per unit = $20 - $6 = $14

B. CM per board = Sell Price - Variable Cost per unit - Commission per board = $20 - $6 - ($20 x 10%) = $12

C. CM per board = Sell Price - Variable Cost per unit - Commission per board = $20 - $6 - ($20 x 25%) = $9

2. Compute the breakeven point in number of boards for each of the three options.

A. BEP = Fixed Cost / CM per unit = $5,600 / $14 = 400 boards

B. BEP = $3,800 / $12 = 317 boards

C. BEP = 0

3. Which payment plan has the lowest risk of loss for the charity group? Why? (note that the scenario makes the unrealistic assumption that all unused materials can be returned.)

Option C payment plan has the lowest risk of loss for the charity group because this option shares the revenues produced without any fixed costs. Considering that all unused material can be returned, this is the lowest risk option for the charity.

4. Which payment plan has the highest profit potential assuming that there is very high demand for the boards? Why?

Option A has the highest profit potential assuming there is a very high demand for the boards. The CM per board for A is 14 so after the charity sales 400 boards, they have a higher potential profits.

5. At what number of sales would the charity be indifferent between options A and C? (Hint: recall that Profit = Q x (unit CM) Fixed Costs. Use algebra to determine at what level of Q the profit equations for A and C are equal.)

Q x ($14) - $5,600 = Q x ($9) - 0.25($20)(Q) (this doesnt see correct)

$5Q = $5,600

Q = 1,120

6. How can Audubon Advisors use the number computed in #5 to help the charity make its decision as to which option to select?