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 a piece. 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 Ravi's 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 Ravi's 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 Corsica's 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 Accord's 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.