Question

Madeline and Harris have decided to start a new business. Madeline is a graphics art major who recently designed a unique and copyrighted design that could be appealing to baseball fans. Harris who is majoring in sports marketing loves the design, and convinced Madeline to test market her design on a baseball cap/ hat. After doing some research they decide lease an outdoor vendor space on Yawkey Way next to Fenway Park. The plan is to start with baseball caps using the design Madeline created and to market and sell these hats to people attending Red Sox games. If things go well they plan to add t-shirts and jackets later.

Madeline and Harris have collected some preliminary information which includes the following:

-  Leasing space on Yawkey Way will cost $10,000 for the season

-City fees and taxes will cost $2,500

-    The cost to buy the hats with Madeline’s logo will be $5

-     They plan to sell the hats at $20

-        They are guessing sales will be between 25 and 40 hats a game

-        They would like to make $5,000 each after paying for all costs and expenses

Madeline and Harris have agreed that they will also need to hire a person to manage the booth. They are planning to pay this person $15 an hour, and figure it will take 6 hours for each game. Madeline and Harris are wondering what other costs they might incur in running this business? For example transportation, booth, marketing and advertising

Questions: - What are their fixed and variable costs?

-        How many caps will they need to sell to break even

-        How many caps will they need to sell to make their desired profit?

-        What happens if prices drop by $5 or $10?

-        What happens if fixed costs increase by 10%?

-        What opportunities, risks, and concerns should be considered?

Construct a contribution margin analysis to illustrate the outcomes   

Answer 1

Given Details
Leasing Space	10000
City fees & taxes	2500
Hiring charges for the person managing the booth per gamer	$15/ hour for 6 hours
	= 15*6 = $90
Cost to buy the hats	5
Sales price	20
Sales expectation	25-40
Expected profit	5000 for each person
	ie 10000

What are their fixed and variable costs?

Fixed costs:

Leasing Space $10000

City fees & taxes $2500

Semi Fixed cost:

Hiring charges of a person managing the booth: $ 90/ game

This cost is fixed for each game, not for the season

Variable Cost

Cost to buy the hats = $ 5/ hat

How many caps will they need to sell to break even

Break even= Fixed cost/ contribution per unit

Here contribution= sale price- variable cost

= 20-5

= $15

Fixed cost= Leasing Space + City fees & taxes

= 10000+2500

= $12500

Break even sales= Fixed cost/ contribution per unit

= 12590/15

= 833.3333 sales

= 834 sales(rounded)

In that case, the maximum sales from a game is 25-40. so lets take its average as the sales per game, ie (25+40)/2= 32.5. So lets assume sales for each game is 32.5 hats.

The hiring charges of person managing booth changes with each game. Hence for each sales of 32.5 hats, we will incur a additional cost of $90.

Additional cost

hence for 834 sales, 26 games(Rounded) should happen. ie, semi fixed expense= 26*90= $2340

Additional sales= Semi fixed expense/ contribution per unit

= 2340/15

=156 hats

Hence breakeven = 834 hats+156 hats = 990 hats.

For 990 hats,31 games should happen(990/32.5). hence we should include the semi fixed expense of extra 5 games(31-26)

Additional sales= Additional semi fixed expense/ contribution per unit

= 90*5/15

=30 hats

for extra 30 hats, one more game should happen,

hence additional sales= 90/15= 6 hats

so total breakeven sales= 834+156+30+6

= 1026 hats

To prove:

Total contribution = 1026*15 = 15390

less: Fixed expense: 12500

Less: semi fixed expense:

(1026hats /32.5 hats)* $90 2880(rounded)

10

hence BREAKEVEN SALES= 1026 HATS

How many caps will they need to sell to make their desired profit?

Desired profit	10000
Fixed expense	12500
Total   (A)	22500
Contribution(20-5)   (B)	15
Req. sales to cover desired profit & fixed cost(C)    (A)/(B)	1500	sales
Average sales per game (D)	32.5	hats
Game required to achieve the sales (C)/(D) (rounded)	46.15384615	(1500/32.5)
Rounded to	47	games
Semi fixed expense	47*90
	$4,230.00
Req. sales to cover semi fixed cost	4230/15
	282	sales
Game required to acheive the sales of 282 hats                           ((1500+282)/32.5-47games)	7.83
Rounded to	8	games
Semi fixed expense	8*90
	720
Req. sales to cover semi fixed cost	720/15
	48	sales
	1.3
Rounded to	2	Games
Semi fixed expense	2*90
	180
Req. sales to cover semi fixed cost	180/15
	12	sales
Game required to acheive the sales of 48 hats                                           ((1500+282+48+12)/32.5- (47+8+2))	0 game
Hence Required Sales	1500+282+48+12
	1842
To prove:
Required Profit	10000
Fixed cost	12500
Semi fixed cost (1842/32.5)*90	5130	57 game*90
Total	27630
Contribution(1842*15)	27630

What happens if prices drop by $5 or $10?

If price drop by $ 5. the contribution will be $10(15-5)

If price drop by $ 10, the contribution will be $ 5.(10-5)

The price drop will affect the profitability and gives a higher breakeven sales.

  What happens if fixed costs increase by 10%?

Present fixed cost= 10000+2500 =12500

10% increase= 12500*10%= 1250

New Fixed cost= 13750

If fixed cost increase, it will decrease the profit and will result in a higher breakeven point.