Sunshine Hendricks owns a business called Dont Burn Man. Sunshine sets up shop for two weeks at the Burning Man festival outside of Gerlach, Nevada every year. This is the only business Dont Burn Man conducts during the year.

Dont Burn Man sells three products: Bags of Ice, Popsicles, and Sunscreen. The selling price for Ice is $5/bag. Popsicles sell for $3/each. Sunscreen sells for $15/bottle. Dont Burn Man buys bags of ice for $1.05 each. They buy popsicles in a pack of 100 for $38 and sunscreen in packs of 10 for $44.

Dont Burn Mans other costs include:

• Credit card fees are 4% of the sales transaction. Dont Burn Man only accepts credit cards and does not accept cash for security reasons (the playa is a tough place).
• Dont Burn Man hires one employee for the event and pays her $1,500 for the two weeks, plus a space in the tent.
• Dont Burn Man must get a permit to sell at Burning Man. The fee for the permit is $500.
• Dont Burn Man must pay for gasoline to and from the event and to power the generator for the freezer. Gas generally costs $600 for the two week period.

Dont Burn Man has two fixed assets that they use at Burning Man every year. These assets are only used during the two week festival and not used for any other revenue generating activities throughout the year. They own a truck with a built in freezer that they purchased in 2019 for $20,000. They estimate theyll be able to use the truck for 6 years and will be able to sell it for $2,000 when theyre done with it. They also have a generator, which was purchased for $2,000 in 2020. They expect the generator will last for 5 years and will be worthless at the end of 5 years.

Dont Burn Man would like you, their accountant, to help them analyze their business. In Module 12, you analyzed costs, break even and target income. In this module, youll use that analysis to help with some business decisions.

Dont Burn Man has one freezer that must be shared by both ice and popsicles. The freezer has a capacity of 48,000 square inches. One bag of ice takes up 8 square inches. One popsicle takes up square inch. They estimate that if they had enough space, they could sell 10,000 bags of ice and 3,000 popsicles.

Decision #1

- Dont Burn Man would like to maximize their profits. As they plan for next year, how many bags of ice and how many popsicles would you recommend that they stock in the freezer? -

Dont Burn Man is thinking of expanding. Sunshines grandmother has offered Sunshine a loan for the business. Grandma is not charging interest and has asked that Sunshine pay back the loan when she can.

Dont Burn Man is considering two options: an additional freezer or a wifi hotspot.

Investment Option #1: Freezer

The first option is an additional freezer that would allow Dont Burn Man to stock enough ice and popsicles to meet market demand. The freezer comes with its own trailer and costs $53,000. Dont Burn Man estimates the freezer could be used in operations for 10 years and could be sold for $3,000 after that time. The freezer could operate off of the existing generator, but would require an additional $200 of gasoline. Sunshine believes that she and the one employee could manage the increase in business without the need to hire additional help.

Investment Option #2: Wifi Hotspot

The second option is a wifi hotspot tower. The playa that hosts Burning Man does not have cell service, leaving Burning Man attendees with no ability to post to social media. This investment option would allow Dont Burn Man to sell wifi access. Dont Burn Man expects they can charge a flat rate of $29.95 for the two week period. The Wifi Hotspot comes with its own trailer and generator and costs $530,000. It is estimated that the Wifi Hotspot can be used in operations for 3 years before the technology becomes obsolete. At that time, the hotspot will be worthless. Because the generator is integrated with the hotspot, it will be worthless as well.

Dont Burn Man estimates that will need to buy an additional $1,000 of gasoline to run the hotspot generator. They will also need to hire a qualified IT employee to run the hotspot and fix any issues. They have found the perfect candidate who is willing to join the Dont Burn Man team for $10,000 for the two weeks. They will also need to purchase a two week satellite subscription to provide internet access to the hotspot for $50,000.

Decision #2

- Assuming Dont Burn Man can only choose one investment opportunity, should they choose the additional freezer or the wifi hotspot. -

!!! ASSIGNMENT!!!

1. For each decision, identify one cost that is relevant and one cost that is irrelevant to the decision (Incremental Costs, Relevant Benefits, Sunk Cost, Out of pocket cost, or Opportunity Costs)
2. Calculate the optimal number of bags of ice and popsicles for Dont Burn Man to stock, given the resource constraint of one freezer
3. Use capital budgeting analysis tools to help Dont Burn Man select the best investment opportunity. Use at least one tool that uses the Time Value of Money and at least one tool that does not use the TIme Value of Money