PLEASE READ THE FOLLOWING INFORMATION ABOVE THEN ANSWER THE QUESTIONS:

If Giulia accepts the customers contract offer, how would her business model change in terms of revenue and cost structure (i.e. the mix of variable and fixed costs)?

Using Stanley Kowalcheks operating costs as your best-guess data about the cost of operating the forge, complete a breakeven analysis for each of the two basic business models (i.e. the current outsourcing arrangement and operating the forge). NOTE: Electricity is a mixed cost (i.e. it has a fixed amount and variable amount). Use $1,728 as the fixed cost and $0.18 per piton as the variable cost.

Is the analysis you completed informative? How can Giulia use or extend the breakeven calculation to add more information to her understanding of the situation?

What other contextual information given in the case is relevant to Giulias thinking about her next move? Why? What other data should she be seeking? Why and how would she use it?

Based on your analyses, what advise would you give Giulia?

Giulia's original trial order was for 1,000 units, but soon she had a reorder rate of 1,000 per month. The retailer paid Giulia \$11.00 per unit for the pitons and absorbed the shipping costs. The forge charged her $9,000 to make and pack an order of 1,000 pitons. After accounting for material waste and recovery, the cost of the titanium alloy bars was $1.45 per piton. Clearly, she was not making much money on the business. In fact, a minimum wage job would have provided more income. However, what mattered to Giulia was the proof of concept-she could successfully design and sell her own products. The start-up risk and capital requirements had been low and now she had her own business. Giulia had been thinking about ways of increasing profits, including an idea for a new product line, when a quick series of surprise events changed the landscape. First, she received a call from her single customer. He told her that he had been impressed with the quality and design of her product and proposed the following offer: "If you give me an exclusive supplier arrangement for two years, I will guarantee you a purchase volume of at least 4,000 units per month at $10.50 per unit for the length of the two-year contract. I have to tell you, however, I think demand could be about 10% higher, but I will not commit to that for the length of the contract." Her elation at that offer quickly evaporated because the $10.50 price would barely cover her current unit costs. She also knew that even four times the current purchase quantity would not qualify her to move to the next level of volume discounts on material. She wasn't even sure that her contract manufacturer had the available capacity to quadruple production for her, nor whether he would give her a price break for that extra volume. The second surprise came when she contacted her contract manufacturer to make those inquiries. Before she could even raise the questions, he interrupted her to say that he had been meaning to call her. He had just decided to close down his business and retire. He asked if she wanted to buy the company. She felt her jaw drop open but quickly refocused and told him that she might be interested. First, she said, she would need some operating data from him. He agreed to provide what he could and suggested that she come to the factory to talk about it. Giulia learned a few things even before getting to the quantitative data. First, the owner, Stanley Kowalchek, was 66 years old and his wife wanted them to spend most of the year at their second home in Clearwater, Florida. Both of his children were grown and had no interest in the business. His business had thrived in the 1990 while he was the exclusive forged parts supplier to a company that made medical implants, mostly for hip and knee replacements. However, that business had changed and his customers had begun to shift contract production to China. In fact, for the last three months, Giulia had been his only customer. Giulia also learned that Stanley had been operating with a minimum "skeleton" crew of six workers. They were all capable of working any of the equipment, and, because of the low demand, they were required to move from work station to work station to fill Giulia's orders. Even so, Stanley told her, her volume of 1,00o units consumed only about one week of labor capacity per month. She quickly realized that she would need all six, then, if her demand increased to 4,000 units per month. The laborers were paid wages that totaled $57,500 per year each, including benefits, holiday and vacation pay, and so forth. For six workers, that totaled $345,000. Given that it would take a month to make 4,000 units and 12 months to make the full 48,000 units, labor cost per unit would be $7.19. Stanley told her that occupancy costs (lease costs for the building and maintenance and utilities costs other than electricity) totaled $33,000 for the last year. The equipment takes a beating, so it needs to be replaced regularly, but Stanley assured Giulia that it was all in good working order and in the middle of its useful life. Depreciation on the equipment was $14,355 last year. Stanley appeared to be fairly cost conscious. For example, he kept track of the supplies used in the plant daily. He was able to tell Giulia that the cost of supplies for the last order of 1,000 pitons he made for her was $110.00. He was also very focused on energy consumption and had metered all of the production equipment. He used this to monitor KwH usage. However, he still received only a single electric bill. For last month, when the only production was 1,000 units for Giulia, the bill was \$1,908. However, two months back he had made 1,300 units for her, since one order had spanned the end of one month and the beginning of the next. The bill that month was $1,962. Some comments Stanley made led Giulia to believe that he no longer considered the business a "going concern" and that he was simply looking to sell the assets. He would be disposed to sell them all to a single party, especially if the buyer would be inclined to keep his long-time workers employed. Based on some quick internet research, Giulia concluded that the purchase price for all the business assets would be under $100,000. Giulia realized that this could be a once-in-a-lifetime opportunity. She had guaranteed demand. No matter what she decided, she knew that she would not take a salary for at least the first year, but if she were operating the forge she would incur some administrative costs that would average about $600 per month related to the various duties associated with payroll, property management, and other issues. She needed to think about how her fledgling business would be affected if she absorbed the operation of the forge, both immediately and in the future. She decided to call her father to talk it through with him after doing some preliminary thinking about the situation