Question

Sanjana's Sweet Shoppe operates on the boardwalk of a New England coastal town. The store only opens for the summer season and the business is heavily dependent on the weather and the economy in addition to new competition. Sanjana Sweet, the owner, prepares a budget each year after reading long-term weather forecasts and estimates of summer tourism. The budget is a first step in planning whether she will need any loans and whether she needs to consider adjustments to store staffing. Based on expertise and experience, she develops the following. Gross Margin per Customer (Price – Cost of Goods) $5 Scenario Good Fair Poor Number of Customers 30,000 20,000 15,000 Sanjana assumes, for simplicity, that the gross margin and the estimated number of customers are independent. Thus, she has nine possible scenarios. In addition to the cost of the products sold, Sanjana estimates staffing costs to be $25,000 plus $2 for every customer in excess of 20,000. The marketing and administrative costs are estimated to be $10,000 plus 3 percent of the gross margin. Required: Prepare an analysis of the possible operating income for Sanjana similar to that in Exhibit 13.15. What is the range of operating incomes?

Answer 1

Solution:

				Operating Costs			Marketing & Admin Cost
	Gross Margin per Customer $	Number of Customers	Gross Margin = Gross Margin per Customer $ x Number of Customers	Fixed Cost $25,000 (A)	(+) $2 for every customer is excess of 20,000 (B)	Total Operating Cost $ = (A) + (B)	Fixed Cost $10,000 (C )	(+) 3% of Gross Margin (D)	Total Marketing & Admin Cost $ = (C ) + (D)	Operating Profit (Loss) $ = Gross Margin - Total Operating Cost - Total Marketing & Admin Cost
Poor	2	15,000	30,000	25,000	-	25,000	10,000	900	10,900	(5,900)
Fair	4	15,000	60,000	25,000	-	25,000	10,000	1,800	11,800	23,200
Good	5	15,000	75,000	25,000	-	25,000	10,000	2,250	12,250	37,750
Poor	2	20,000	40,000	25,000	-	25,000	10,000	1,200	11,200	3,800
Fair	4	20,000	80,000	25,000	-	25,000	10,000	2,400	12,400	42,600
Good	5	20,000	1,00,000	25,000	-	25,000	10,000	3,000	13,000	62,000
Poor	2	30,000	60,000	25,000	$2 x (30,000 – 20,000) =                 20,000	45,000	10,000	1,800	11,800	3,200
Fair	4	30,000	1,20,000	25,000	$2 x (30,000 – 20,000) =                20,000	45,000	10,000	3,600	13,600	61,400
Good	5	30,000	1,50,000	25,000	$2 x (30,000 – 20,000) =               20,000	45,000	10,000	4,500	14,500	90,500