EXHIBIT C7.4 Plastic Display Case Cost Structure Variable costs Production cost $7.50 Packaging cost Shipping cost (from factory) Comment card cost & postage $0.80 $1.50 $0.90 $10.70 Total variable costs Fixed costs: $1000.00 Storage Salaries $50,000.00 Advertising $1200.00 Insurance $500.00 Total fixed costs $52,700.00
Looking for the break-even point from the information provided.
The Smiths need to develop an analysis of their breakeven point for the plastic display case based on sales of the product directly to the consumer as well as through retailers. If the product were sold to retailers, the price would have to provide retailers with an adequate markup. Exhibit C7.4 presents the expected cost structure for the Unique Display Cases display case developed by their accountant. Based on competitive prices, the Smiths expected to offer their product in direct to consumer sales for $24.99 plus $2.99 for shipping and handling. The price to retailers would have to be negotiated but would be 30–40% less to allow an adequate markup for the retail firms.
The production cost of $7.50 was based on a production run of 5000 units in one color. At 10,000 or more units, production cost would drop to $5.75 per unit. The company that would produce the plastic unit had production capacity of 25,000 units a year. The injection model itself would have to be designed and manufactured by a design company. The cost of the mold was estimated to be about $10,000 and would be amortized over a 5 year period.
The Smith’s need to estimate how much additional investment is needed to launch the new product, including the injection mold, purchase of an inventory of shipping boxes, and an investment in inventory of 5000 display cases, and operating capital to cover expenses until the sales volume was high enough to cover operating expenses. They also need financial projections for the product to determine the potential profitability at various sales volumes from a low estimate of 500 units to higher levels of sales like 1000, 5,000, and 10,000 units. These estimates or pro forma income statements would be needed to borrow capital to launch the product.
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 3 images
