Question b i, ii, iii

3 Finance and Accounts Practice question Dan Electro Dan Bowen is a sole trader who sells digital cameras directly to consumers. He owns an online business and all sales are processed electronically under the business name Dan Electro. The office, storage place and call centre are located together in an expensive and desirable city centre location. Dan started the business three years ago by borrowing a considerable amount of money from a bank. He used his residential property as collateral* for the loan. The cameras are bought and shipped from a reputable and reliable overseas supplier who charges a high price for good quality cameras and prompt transportation. Dan has to pay in advance for the cameras. Dan Electro's customers are very loyal and see their purchase as good value for money. Repeat purchases comprise a large percentage of Dan Electro's sales. Some customers have even indicated that they would pay a higher price for the cameras because of their quality and the good service he provides. Dan is now worried about the forecasted rise in interest rates, inflation and an increase in online competition. Dan Electro may face some cash flow difficulties in the coming years. He is considering various strategies in order to prevent such possible cash flow difficulties. Financial information for 2010 (all figures in US$) Fixed costs per year Rent Marketing Administration Interest payments 20 000 4000 5000 1000 Variable costs per camera Camera Transportation Direct labour Price per camera 135 45 20 250 Dan is expected to sell 700 cameras in 2010. a) (i) Define the term variable costs. [2 marks] (ii) Identify two advantages for Dan of operating as a sole trader. [2 marks] b) (i) Construct a fully labelled break-even chart for Dan Electro for 2010. Calculate and indicate the break-even point, the margin of safety and the projected profit at 700 cameras (show all your working). [7 marks (ii) Calculate the number of cameras Dan Electro must sell in order to double the projected profit (show all your working). [2 marks] (ii) Calculate the price per camera that needs to be charged (at expected sales of 700 cameras) in order to double the projected profit (show all your working). (iv) Explain two possible limitations of the break-even model as a [2 marks] decision tool for Dan Electro. c) Examine two possible strategies for Dan Electro to prevent cash flow difficulties. IB, Nov 2010 [4 marks) [6 marks)