UMUC DMBA620 Break Even Assignment
Tiffany Nadeau established and ran a small workshop that manufactured original design quality jewelry. What began as a hobby for sale in craft shows grew into a small on-line business. Later, it became a manufacturer for upscale jewelry shops in tourist locations across the country. To accommodate the greater volume, Ms. Nadeau opened a small workshop in the historic district of Santa Rosa, California, about 50 miles north of San Francisco. She paid the following prices for some of her raw material: Gold $1,200 per ounce, Silver $16.50 per ounce. Gold and Silver prices have been volatile making pricing difficult.
She marketed these creations to gift shops across the United States in batches of 20 assorted items, for which she charged $2,880 per batch. In turn, the gift shop sold the jewelry at prices averaging eight times what they paid for the jewelry.
Tiffany had a staff of 11. Ten workers produced the jewelry and Joseph helped with shipping and cleanup. The production people were paid $30 per hour including benefits and Joseph was paid $20 per hour for his unskilled labor. Jewelry production varied between a low of 14 and a high of 26 batches per week, and averaged 1,000 batches per year. Each batch cost $130 (excluding wages) to pack, ship and insure, with Joseph doing all the packing and shipping. It takes Joe 1 hour to pack and ship one batch. Joe also does other chores, such as sweeping, vacuuming and cleaning, and he averages 30 hours per week of employment with Tiffany’s workshop, for the 50 weeks per year that he works for Tiffany (with his time split between packing and shipping of batches and doing weekly cleaning, etc.)
Tiffany spends 10 weeks a year touring the U.S. She attends trade shows in order to sell her jewelry, and to find suppliers of the components for her products. Her travel, hotel, show fees, and food costs were $4,200 each week. Workshop rent and utilities cost her an average of $7,500 per month. Insurance including liability, workers compensation, and unemployment cost $1,500 per month. Advertising in trade journals and on Fashionista.com cost $38,000 per year.
Tiffany works 40 weeks a year at making jewelry, often working over 50 hours per week. She spends 10 weeks marketing and takes 2 weeks of vacation.
The cost of raw materials averaged $1,900 per batch. It takes Maria and Juanita 20 hours per batch to manufacture the jewelry. Tiffany does design work, creates the molds for the jewelry and spends time making the items as needed to meet orders.
Business was brisk, and Tiffany could easily sell every batch that she produced. But she found herself earning very little money, and after paying her 45% income tax for US and California, she found herself with almost no money to live on. That led her to ask for your help.
She complained to you that she worked very hard, 50 weeks a year, but ended up broke and frustrated. Tiffany said that Santa Rosa was expensive even though home prices were less than half of what they were in San Francisco, some 50 miles to the south. Reasonable homes sold for $500,000 to $2,000,000. These were about 4 times the price of homes in Croydon, New Hampshire where her sister lived. With property taxes and insurance, Tiffany thought that she needed at least $5,400 per month for her mortgage payment. That payment was far beyond what she can afford. She would need $10,000 per month after tax to afford the mortgage and have enough left for a moderate lifestyle.
You agreed to analyze her business operations and to advise her how to reach her goal of earning $120,000 per year, after taxes.
After some calculation and some thought, you conclude that Tiffany has to increase her revenues, perhaps by achieving greater volume, or perhaps by raising her selling price. Write a short report directed to Ms. Tiffany Nadeau with your recommendation on how to increase revenue, supported with a pro-forma contribution income statement, which incorporates your recommendations. You should show all calculations in a Microsoft Excel document. Include a breakeven analysis for zero profit and a second analysis to achieve an after tax target income of $120,000 for Ms. Nadeau and provide your conclusion. (The report to Ms. Nadeau can be written in a Textbox (Textboxes automatically wrap text) in a separate worksheet in the same Excel document.