Question 1

a) Ravi makes and retails only one product, photo frames. She buys the wooden frames in bulk for $3 each and it costs another $1 to add cool designs to the product. Last year, Ravi sold 2,000 frames for $12 apiece. She paid $300 a month to rent a sales booth at his local outdoor market, along with a sales commission of $1 per frame sold (her sister made all the sales on commission). Complete Ravis Frames contribution income statement.

b) Ravi is wondering what her break-even point is. Calculate both the break-even revenue and sales volume.

c) Next year, Ravi is planning to sell 3,000 frames. What will be his margin of safety?

d) Prepare a Cost-Volume-Profit graph for Ravis Frames. Label the axes, lines, loss and profit areas, and break-even point clearly on your graph.

Question 2

Ben is starting college next month. He currently has a 1997 Chevy Corsica, purchased a year ago for $2,000. The Corsicas annual insurance totals $2,000 and fuel expense (to and from college) is estimated at $200 per month. He estimates that the Corsica will have repair costs of $500 per year for the next four years. Ben expects the Corsica to be worthless by the time he graduates college. Ben is considering selling the Corsica for $1,000 and purchasing a 2010 Honda Accord for $7,000. By doing this, he will be comfortably work as a SkipTheDishes driver, generating $1,200 in monthly revenues (approximately 70 hours of work per month). Because of the higher mileage, Ben expects to pay $800 a month for fuel and $300 per quarter for repairs and maintenance. The Accords insurance will be $210 per month. Ben believes he will be able to sell the Accord for $2,000 fours years from now. Advise Ben on buying the Accord, discussing all relevant factors.

Question 3

Kayleigh, a second-year business owner, has learned a bit about budgeting but needs some more insight. At the start of the year, she made a budget for selling 2,000 umbrellas, her main product. Kayleighs prices vary based on the weather (she increases prices on rainy days and offers discounts on sunny days), but she budgeted at an average sale price of $8 per umbrella. It is now near the end of the year and Kayleigh expects the final sales number to total 2,200 umbrellas at a price of $7 each. She suspects that her variable expenses for umbrella purchase, design additions, and marketing, budgeted at a total of $10,000, are over by 10%. However, she considers the increased costs to be direct results of higher sales volume which is a good thing. Kayleigh believes she fixed costs for her store have remained on budget. She decided not to track fixed costs for umbrellas since she does not know if things like employee salary, store rent, etcetera can be allocated accurately.

Give Kayleigh some advice on budgeting, including discussion of how flexible and static budgets can impact her specific situation. Also, analyze her business situation and make recommendations.

Question 4

Joey is trying to make sure he meets the standards he has set for labour expenses at his business. He believes each product can be built in 2.33 man-hours and each man-hour should cost $20. He is considering the following options for his six workers: Option A- hourly wages with small bonuses Option B- hourly wages with large bonuses Hourly wage: $19 Hourly wage: $17 Annual hours per worker: 2,000 Annual hours per worker: 2,200 Expected production: 5,150 units Expected production: 6,200 units Expected product defect rate: 1% Expected product defect rate: 2.5% Expected performance bonuses: $0 Expected performance bonuses: $75 per 100 units Expected year-end bonuses: $1,000 per worker Expected year-end bonuses: $3,000 per worker

Analyze and discuss the pros and cons of each option. Make recommendations to Joey (feel free to make other business recommendations, not limited to salary structure).