5-1 Project One- Lorenzo’s Poster Shop Presentation Speaker Notes

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5-1 Project One: Lorenzo’s Poster Shop Presentation Speaker Notes Nicole Sheppard Southern New Hampshire University ACC 311 – Cost Accounting Tara Willis October 1, 2023

Lorenzo’s Poster Shop Presentation Speakers Notes Slide One- Introduction (Lorenzo’s Poster Shop) Hello everyone, my name is Nicole Sheppard and today we will be discussing several different options and pricing scenarios in reference to Lorenzo’s Poster Shop. With Lorenzo’s target profit, I have analyzed some data to help in making a decision on the direction Lorenzo should go in. This will give a clear picture of whether or not certain options are cost-effective for the business and if taking on special orders will gain the business more profits. Slide Two – Key Points Before we get started, I believe that a little bit of background on the company can be helpful in your understanding of the discussion and presentation today. Lorenzo’s Poster Shop for the last two years has only been breaking even, being unable to generate any profits for the business. In order for Lorenzo to be able to keep the poster shop open, he must be able to earn at least $12,000 in operating income for the next year. Hopefully, in the years to come, he will be able to continue making more than that. We will be discussing a few scenarios to help in the decision of which strategy and direction would be best for Lorenzo’s Poster Shop to go in. We will be able to see which scenario will generate the most amount of profit so the business can become more successful within the community. The current figures at Lorenzo’s are as follows. Each poster made has a selling price of $7.50. His variable costs are broken down into the paper costing $0.70 per unit, the printing of the poster costing $1.10 per unit, and the film for the posters costing $0.60 per unit, totaling $2.40 per unit made. Lorenzo’s contribution margin for the posters is $5.10. There are also fixed

costs for the company which consist of the staff’s salaries at $48,000, and the operating costs for the business which equals $12,128. Together these total $60,120. Lorenzo would have to sell a total of 11,789 units because you cannot sell a fraction of a unit. Although the graph says 11,788.4, you round this up to make a whole unit. With the aim of breaking even, the total fixed cost of $60,120 is divided by the contribution margin of $5.10 to obtain the number of units needed. Slide Three – Key Points (Scenario One) As you can see, the first scenario proposed is to lower the selling price by 10% to increase the sales volume by 5%. A few advantages of this scenario are by lowering the selling price, there is the possibility of attracting more customers to the store because posters are now selling for $6.75. Also, by increasing the sales volume by 5%, the sales volume units would increase to 12,379 which in turn puts sales at $83,558.25. A negative operating income of $6271.35 is left after factoring in Lorenzo’s variable costs and fixed costs which include salary and other operating costs. There is not enough profit generated to break even when selling a poster below $7.50, which is a disadvantage for the poster shop. It is not a good idea for Lorenzo’s to sell at a 10% decreased price because even though the sales volume could increase, it is still not enough to generate enough profits. Slide Four – Key Points (Scenario Two) Scenario two suggests that Lorenzo advertises on the radio and social media sites for an additional $1,000 a month. In turn, there should be an increase in sales volume of 10%. Advantages of this include increasing the sales volume of units to 1179, which would increase the sales to $97,260. This in turn generates a positive operating income even after taxes at

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$3761.60. Some disadvantages of this scenario are although Lorenzo is making positive operating income, it is still not enough to break even. With a target profit goal of $12,000, Lorenzo’s would need to generate $8237.40 more to keep the poster shop open. Lorenzo would have to generate even more to make his business gain a profit. Slide Five – Key Points (Scenario Three) The third scenario suggests switching the materials of the posters to a more affordable paper costing $0.60 per unit, and a less expensive film costing $0.40 per unit. An advantage to doing this is the variable costs of making the posters are lowered to $2.10 per unit. In turn, this makes the contribution margin less which increases the profitability per poster sold. Disadvantages of this scenario are the operating income is only $3,540.60 before taking out 25% for income taxes. Again, this scenario does not meet the target profit that Lorenzo has set. He would need to generate an additional $9344.55 to break even and begin being profitable. Slide Six – Key Points (Scenario Four) Scenario four suggests moving the business to a commission-based compensation plan instead of the usual fixed salary for its salespeople. This saves the company $20,000 in salary, but now there is a $1.50 commission that is incurred for each unit that is sold. This in turn should increase the sales volume by 20%. An Advantage to this is that the fixed costs of the business are reduced by $20,000 which is a huge amount of savings for Lorenzo. This scenario comes with multiple disadvantages. With this scenario, the variable cost per unit is increased to $3.90 from the original $2.40 because of the added commission charge. Furthermore, switching to commission-based compensation continues to not meet the target profit goal. It is off by $3893.10 after taxes have been taken out.

Slide Seven – Key Points (Scenario Five) Lastly, scenario five suggested that Lorenzo’s advertises on the radio and social media for the additional $1,000 a month while moving from a fixed salary to the commission-based compensation plan. This in turn could increase the shop’s sales by 25%. Advantages to this scenario are new customers being drawn in by the advertisements adding to business. And, the company will be saving $20,000 in fixed costs from its employee's salaries while potentially increasing the company’s sales by 25%. Disadvantages to this scenario would be Lorenzo’s still not meeting the profit goal before taxes. They are missing it by $66.80 before taxes are taken out and after taxes they are at $8949.90. Slide Eight - Recommendations After discussing every scenario that has been given, we will discuss which option is best for Lorenzo’s Poster Shop. In every scenario that has been touched on, the posters were priced at $7.50 per poster, leaving all calculations based on that price. Based on the information we have obtained, I would not recommend any of these scenarios for the poster shop, because none of the operating incomes met Lorenzo’s profit goal before and after taxes. Lorenzo also requested an analysis of these scenarios with a price increase of $9.25 per poster. Because he is the only poster shop in the area, he wanted to see what increasing the sales price of the posters could potentially do for his business. Following through with each scenario, scenario one would generate a net income after taxes of $9,919.18. This still would not be recommended for Lorenzo because it doesn’t quite meet the target profit goal. On the other hand, scenarios 2-5 would be suitable options for Lorenzo with the price increase because they had a net operating income greater than $12,000.

Scenario two had a net operating income of $20,783.10. Scenario three had a net operating income of $18,128.51. Scenario four had an operating income of $26,674.84, and scenario five had $28,292.21. All of these incomes were after taxes had been taken out of them. With that being said, I would suggest that Lorenzo goes with scenario five as long as he uses the price increase. Lorenzo would be advertising on the radio and social media for $1,000 a month while moving the fixed salaries to a commission-based compensation and possibly increasing sales by 25%. According to my analysis, Lorenzo stands to have the best operating income and generate the most profit by using this scenario. Slide Nine - Recommendations When reaching out, Lorenzo was approached by a customer about a potential custom order, and he was curious about whether the order should be taken or not. The customer is asking for Lorenzo to make 500 customer posters and would like to purchase them at $7 apiece. The customer would like the posters to be made on a different type of paper which will cost him $0.10 more per poster to make, while also paying an extra $1,000 in employee costs. After calculating this option, I believe that it would be in Lorenzo’s best interest to take this special order as he will gain an increased $937.50 in profits. In all of the scenarios before the price increase of $9.50 per poster, he stands to make more income. Even if Lorenzo was to follow scenario one where the operating income is negative $5337.50, he would be in less debt by taking this special order. Slide Ten – Potential Impact of Commission-Based Salesforce

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Moving forward, moving Lorenzo’s from a fixed salary workforce to a commission-based sales force seems to be the best plan. It would be best to look at any potential impact that this could have on the company before moving towards this plan. Having a commission-based salary would help motivate employees to sell more posters which could in turn increase sales for the poster shop. Having the potential to make more money will push them to make more sales! The more sales they make, the more commission they make off of these sales. Many employees tend to take their salaries for granted because it is a set amount being made no matter how much effort they are putting into selling posters. Having to work for a commission will push them to make sales because they have to work for the money they were once making, but they also have the ability to make more than they once did. Employees will be pushed to increase the efficiency and diligence of their work ethic and sales. Another advantage to this would be having the pay tied to the amount of revenue that the business makes. The costs are not always incurred until the sales are made, so the business does not have to pay the commission until the employee makes a sale. Employees are only paid for the sales they produce. Unpredictable expenses are one of the disadvantages that come with moving to a commission-based salesforce. I am not sure if Lorenzo’s Poster Shop allows its customers to pay on an account, but if they do, sometimes customers don’t always pay the full amount or any of their amount, as it is put on a credit card. Once the sale is made, employees will be paid their commission, but the customer may still have the unpaid balance on their account. This causes the business to be paid for the product that was sold after the employee has been paid for the sale. If this is the case, the poster shop needs to come up with money to pay their employees from their own money before they obtain the money for the goods. Slide Eleven – Potential Impact of Supply Quality

One mistake that some businesses make is believing that going with a lower-quality supply reduces the costs of making the goods and will draw in more customers, but this oftentimes is not the case because it lowers the quality of goods that the business is selling. Having a better-quality product oftentimes brings in a better profit because although the price of the product is a little higher, more customers are satisfied with the product and are willing to buy it. The quality of a product directly influences a customer's satisfaction. When a customer buys a product that is made of lower-quality materials normally they are more disappointed. Customers who are more satisfied with goods will rank businesses higher on surveys and websites, and those who are dissatisfied will be sure the leave reviews that are more vocal about their criticisms letting others know not to buy from the company. Businesses that downgrade the quality of supplies in a short-term manner may be ok to generate a quick profit, but because it is not appealing to have a low-cost product this will not last in the long run as it will be disappointing for the customers. Customers want to have affordable products that last a long time, so using quality supplies at affordable prices might be done but they are both strong enough to make products last extended periods of time leading to satisfied customers. Slide Twelve – Potential Impact of Price Increase Lorenzo asked to evaluate a potential increase in the price of $9.25 per poster since he is the only poster shop in the area. Because of this, customers may be willing to pay more and at a higher price for a higher quality product. There is no guarantee that customers will accept this increased price, but why not take the chance? Some customers may be lost in the short-term as they may not be willing to pay an increased price, but on the other hand, you may gain customers looking for a higher quality good at a higher price because it is a better-quality poster. It costs

more but it will last longer because the materials used are better. This increase in price could lead to lower sales volume and may return the same or a higher profit because of the increased price. Increasing the price of the posters from $7.50 to $9.25 per poster may not be as bad as Lorenzo may be anticipating. Slide Thirteen – Wrap Up To wrap up our presentation today, we will go over the main points of Lorenzo’s Poster Shop. The first is that Lorenzo needs to meet a target profit goal of $12,000. Selling at the original poster price of $7.50 is not meeting this goal. Therefore, Lorenzo needs to increase the price of his posters to $9.25 per poster to meet his projected goal. I believe that Lorenzo should also take the customer’s request for a special order because he stands to make $937.50 more in profit from this sale. Why not generate more profit for the business? Lorenzo should also more to a commission-based salesforce instead of continuing the fixed salary because it will help in motivating his employees to sell more while saving him a significant amount of money in the long run. I want to thank everyone for listening today. If there is any question please feel free to ask them now… Slide Fourteen - References

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