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Cost-Volume-Profit Analysis You have an opportunity to start a vending machine business. You have always wanted to be an entrepreneur and enjoy eating snacks so when your friend Katy mentioned that a snack vending machine was needed in the breakroom where she works you decided to look into snack vending. You spoke with the management at Katy's company and they agreed to provide you a space in the breakroom and the access to the breakroom in order to fill it. They are asking for either a monthly rental fee of $100 for the space, or 10 % of the net profits. Now you need to research costs and determine which alternative is better - the fixed monthly rental fee, or the 10% of net profits. Required: 1. Conduct an internet search for vending machines (Sam's Club or Costco are good places to start) to determine the initial cost of your first vending machine for Katy's office breakroom. Make sure your vending machine can offer different types of snacks, not just chips, or just candy bars. 2. Next research the cost of the snacks you will put in the vending machine. Look for bulk boxes of candy bars, bulk packages of chips, nuts, and other types of snacks (again at a wholesale club). For your first time in the vending business, choose one type of snack so that you can easily make your calculations based on the cost of one item in your bulk package you purchase. So for example, choose just candy bars, or just chips, or if you can find a bulk package of a variety of snacks where you can calculate one price for all of the items that would work too. + 3. How much will you charge for one snack item? Show your calculation on your spreadsheet. 4. What is your contribution margin per item? Show your calculation on your spreadsheet. 5. How many items must you sell to cover the cost of your vending machine? 6. After you have covered the cost of your vending machine, what is your monthly break-even point in number of snack items? What is your monthly break-even point in sales dollars? 7. Prepare a Contribution Margin Income Statement showing your net profit assuming you chose the $100 per month space rent option. State your assumptions on how many snacks you think you will sell per month, for example, 100 snacks or 500 snacks or however many you think you can handle servicing based on how many items the machine holds. Omit the cost of the vending machine in your income statement as that is a sunk cost for purposes of determining which rent option to take. 8. Prepare a Contribution Margin Income Statement showing your net profit assuming you chose the 10% of net profit rental option using the same assumptions as in #7. Be sure to run this calculation for different volume levels because the $100 per month is fixed and the 10% of sales is variable, so volume will affect your decision. 9. Clearly state which rental option you choose and why justifying the volume that made your decision. + t Cost-Volume-Profit Analysis You have an opportunity to start a vending machine business. You have always wanted to be an entrepreneur and enjoy eating snacks so when your friend Katy mentioned that a snack vending machine was needed in the breakroom where she works you decided to look into snack vending. You spoke with the management at Katy's company and they agreed to provide you a space in the breakroom and the access to the breakroom in order to fill it. They are asking for either a monthly rental fee of $100 for the space, or 10 % of the net profits. Now you need to research costs and determine which alternative is better - the fixed monthly rental fee, or the 10% of net profits. Required: 1. Conduct an internet search for vending machines (Sam's Club or Costco are good places to start) to determine the initial cost of your first vending machine for Katy's office breakroom. Make sure your vending machine can offer different types of snacks, not just chips, or just candy bars. 2. Next research the cost of the snacks you will put in the vending machine. Look for bulk boxes of candy bars, bulk packages of chips, nuts, and other types of snacks (again at a wholesale club). For your first time in the vending business, choose one type of snack so that you can easily make your calculations based on the cost of one item in your bulk package you purchase. So for example, choose just candy bars, or just chips, or if you can find a bulk package of a variety of snacks where you can calculate one price for all of the items that would work too. + 3. How much will you charge for one snack item? Show your calculation on your spreadsheet. 4. What is your contribution margin per item? Show your calculation on your spreadsheet. 5. How many items must you sell to cover the cost of your vending machine? 6. After you have covered the cost of your vending machine, what is your monthly break-even point in number of snack items? What is your monthly break-even point in sales dollars? 7. Prepare a Contribution Margin Income Statement showing your net profit assuming you chose the $100 per month space rent option. State your assumptions on how many snacks you think you will sell per month, for example, 100 snacks or 500 snacks or however many you think you can handle servicing based on how many items the machine holds. Omit the cost of the vending machine in your income statement as that is a sunk cost for purposes of determining which rent option to take. 8. Prepare a Contribution Margin Income Statement showing your net profit assuming you chose the 10% of net profit rental option using the same assumptions as in #7. Be sure to run this calculation for different volume levels because the $100 per month is fixed and the 10% of sales is variable, so volume will affect your decision. 9. Clearly state which rental option you choose and why justifying the volume that made your decision. + t
