The owner of ZEN Store, Cheryl Smith, is thinking of adding a fundraising program which would encourage nonprofit organizations such as schools, churches and community groups to sell their chocolates. The nonprofit organization would sell the candy bars for $3/candy bar and ZEN would give them a $1.25/candy bar sales discount. In other words, ZEN would collect $1.75/candy bar from the nonprofits.

ZEN would not require a minimum sales quantity from the organizations. ZEN however must order the chocolates from the national organization at least one month in advance and they cannot be returned. The chocolates cost $.75/candy bar with a minimum order of 500 candy bars. Any additional candy bars would have to be ordered in increments of 100. The national organization charges a flat $25 shipping fee per order. ZEN would order once per month.

Since the fundraising plan would not require any additional facilities and negligible processing costs, the only costs associated with the project for ZEN would be the $.75 cost of the candy bars and the shipping cost.

REQUIRED

a. What term best describes the cost behavior for the candy bars? The shipping cost? Use candy bars sold as the activity base.

b. To make the project worthwhile, Cheryl would like to earn a before tax profit of $1,275 for the first month of the venture. What level of sales in units and dollars for the month would be required to meet this target net income amount? SHOW AND LABEL ALL COMPUTATIONS.

c. Assume that the venture is undertaken and an order is placed for 1,000 candy bars in the first month. How many candy bars would Cheryl have to sell to break even for the month? SHOW AND LABEL COMPUTATIONS.

d. If Cheryl would like to earn a pretax profit of $2,000 in the first month how many candy bars would she have to sell in the month to meet this target net income amount? SHOW, LABEL AND EXPLAIN COMPUTATIONS. (Remember ZEN must order candy bars in increments of 100).

e. After running the program for the past year, Cheryl has determined that the fundraising program has not met her expectations and she will discontinue it. She has 150 candy bars remaining and is considering selling them at a discounted price to ZEN's largest fundraising partner.

One of the volunteers at the shop told Cheryl that she would be increasing her profits if she sold the remaining candy bars at any amount since there are no incremental costs. Cheryl is confused because she believes that she cant increase profits if she doesnt charge at least $1.75 - enough to cover her costs.

Who is right? Justify your answer. What other factors should Cheryl consider before selling the remaining candy bars at a discounted price? (You should have a minimum of 3-4 factors to consider.)