Case 1 Solution - ACC 350 Dr. Janice Mereba Case 1 CVP...

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ACC 350 Dr. Janice Mereba Case 1 – CVP Analysis – 75 points DUE BY MIDNIGHT SUNDAY, MAY 2, 2010 Part 1 = 10 points Part 2, 3 and 4 = 15 points each (45) Part 4 Memo = 20 points This assignment presents four different scenarios for an entrepreneur that requires you to make business decisions. In this case analysis, you must calculate breakeven points, identify points at which you should be indifferent between choices, calculate how to achieve after-tax target income, and make rational choices among options, providing discussion to support your recommendations based on the results you obtained. Please use the following to answer the first three questions. Jocelyn Wyndham has been working with a popular fashion designer for the past several years. She decided to open a bridal shop, Jocelyn by Design, where gowns will be custom-designed and fitted for each customer. Since her designs are new and she will be using unknown designers too, she will start low, charging an average price of $2,000. Her designers will earn a commission of 20% of the price. Fabric and notions will cost roughly $350 per gown, and tailors will be paid $150 for fitting each gown. There is a vacant storefront that Jocelyn plans to use. Rent is $2,500 per month. Utilities, insurance, depreciation on sewing machines, store furniture and fixtures will run around $450 per month. Jocelyn will pay herself a salary of $2,400 per month and will pay a sales associate $1,250 per month. The tax rate is estimated by Jocelyn to be 30%. 1. Based on the information, how many Bridal gowns per month would Jocelyn need to sell in order to break even? Please show your work. Price = $2,000 Variable costs = Commissions (20% of $2,000) = $400 Fabric and notions = 350 Tailor fittings = 150 Total variable cost = $900 Contribution margin (CM) per unit = Price – Variable cost = $2,000 – 900 = $1,100 per gown Fixed costs = Rent = $2,500 Utilities, insurance, etc. = 450 Salaries = 3,650 Total fixed cost (TFC) = $6,600 At the breakeven point, Total CM = TFC, so $1,100* Quantity = $6,600. Then quantity = 6 gowns per month at the breakeven point 1
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2. If Jocelyn wanted to earn net income of $7,700 per month, assuming the information given above, what amount of revenue would she need to make? HINT: Keep in mind that taxes must be paid. Show in detail how you arrived at your answer. o To figure out Revenue, first inflate NI to operating Income. NI/(1-tax rate) = Operating Income. $7,700/(1-.30) = $11,000 Operating Income . o Next, add operating income to TFC (from Question 1) and determine the amount of contribution margin needed. It is $6,600 + $11,000 = $17,600 o You can then determine revenue needed two ways.
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Case 1 Solution - ACC 350 Dr. Janice Mereba Case 1 CVP...

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