TANSTAAFL Lets Launch A Business

Who Are These Companies? Truth In Advertising Company: TANSTAAFL = There Aint No Such Thing As A Free Lunch (REALITY) Manufacturer: WAC = We Are Cheap (TRUTH) Broker: AA-YSR = Ask And - You Shall Receive (SERVICE) Retailer: WAIJA = We Are Incredible Just Ask (BET ON IT) Big Picture An Opportunity For TANSTAAFL

An Overview Kelley Students - Seniors three friends came up with an idea for an interactive software involving a business educational simulation game for children ages 8 12; the product will be sold in the toy department. In this game, children are exposed to the basics of business. This insight is considered useful, regardless of what profession these children end up pursuing. It includes insight into drivers of business decisions. Their intention would be to run this business while they complete one more year of school; then they will decide if/who will join the business full time

AA-YSR Broker Opportunity a large broker of educational toys named AA YSR approached TANSTAAFL and expressed interest in representing TANSTAAFL; they specifically believe that they can obtain distribution in a major retailer named WAIJA if the price point is attractive.

The Situation the TANSTAAL team needs to gather information requested by the distributor and determine if they can justify borrowing money required from relatives and friends. What AA-YSR Shared

Requirements TANSTAFFL Has To Work With Broker Mark-Up they require (work on) 10% mark-up to the retailer with all vendors they represent; this is for account management (selling activity). They do not warehouse the product; they do not manage the accounts receivable. Retailer Margin the mass retailers require a 35% margin on software in the toy department during non-promotional periods (everyday); they require a 25% margin during promotional periods. Competitive Retail Price the distributor knows that a price to the consumer of $9.99 will be required by the retailer. Retailer Promotions this product will be promoted for the winter holidays; they drop the retail price to the consumer by 20%; they require a promotional discount from the vendor to allow for a 25% retailer margin. The distributor estimates that 60% of the annual volume will be sold with during this promotional period. Projected Volume assuming that TANSTAAFL can meet the requirements above, AA-YSR believes the retailer will commit to first year annual business of 10,000 units and will be an exclusive retailer for one year. What TANSTAFFL Believes

Assumptions About The Business Cost Of Goods theyve gotten three quotes from reputable vendors to produce and package the educational software. The lowest cost was from a vendor named WAC

Quantity - Units WAC Pricing 10,000 $1.00 Note: assume that to get these prices, TANSTAAFL must agree to an exclusive vendor agreement for the first year. Family And Friends Loans they can borrow whatever is needed BUT they must be able to pay it all back within a year. (In other words they must demonstrate that they can at least break even in Year 1.) Their Plans continue school and work on the side to develop further products and prepare for year 2. Cost Of Year One Operations they would need to commit to one year with the following minimal expectations for this start-up company: Whats Needed Annual Amount Rent office and warehouse $15,000 Administration take orders, etc. $15,000 Warehouse Person fulfill orders $15,000 TANSTAAFL Owners Compensation $0 Professional Fees (Incorporate; Legal; Etc.) $5,000 Total Estimated Expenses (Fixed Costs) $50,000 Estimated Incremental Shipping Cost/Unit $0.50

Life Is Great TANSTAFFL Is On Its Way! The three partners are ECSTATIC They have a likely order for 10,000 units. The everyday retail selling price is $9.99 and their cost from the manufacturer for production including packaging and delivered to their warehouse is ONLY $1.00! How can they miss??? Thats $8.99 over the selling price to the consumer. They know theyre going to be rich! Questions? Break-Even how many units do they need to sell before they make money? Profits how much money will they make with these assumptions? Options what would you do?