Question

Janet has a business designing handmade bookmarkers. Her unit of sale is one bookmarker: She sells 40 bookmarkers per week to a bookstore in her neighborhood · Her selling price is $4.50 each, including an envelope. . Her costs are 80€ per card for materials (construction paper, glue, and paint) and 20¢ each for the envelopes, for a total of $1.00 each. On average, it takes her one hour to make six bookmarkers. • Janet pays herself $9 an hour. · The direct labor for each bookmarker is $1.50 ($9/6). Janet wisely realizes that she must include the cost of her labor in the EOU. Selling Price per Unit: $4.50 Materials: $1.00 1.50 Cost of Goods Sold per Unit: $2.50 $2.50 Gross Profit per Unit: $2.00 Labor: Janet realizes that if the bookstore wants to order more bookmarkers, or if she can sell them to additional bookstores, she will not have enough time to make them all herself. To solve this issue, she hires a friend to make the bookmarkers for $9 per hour. Although the EOU will stay the same, Janet will have more time to look for new opportunities for her business. Her income from the business will now come solely from the gross profit, which is currently $2 per unit. • Janet meets a bookstore-supply wholesaler. He offers to buy 2,000 bookmarkers if Janet can deliver them in one month and sell them for $3.50 each, $1 less than she had been getting Three questions immediately came to her mind: (Answer these questions): 1. Can I produce the 2,000-unit order in the required time frame? 2. If I lower the price to $3.50 for each bookmarker (instead of $4.50), will I still make an acceptable gross profit per unit?

Answer 1

1)

Assuming Janet or her friend works for five days a week for eight hours a day and they work for about 21 days a month. One individual can produce 8 Hours * 6 Bookmarkers * 21 Days = around 1000 Bookmarkers per month in those 21 days. Therefore, if Janet and her friend work together to create these bookmarkers for the whole month, they will complete the 2000 units order.

2)

The cost of each bookmarker will still be 2.50 $ as Janet pays the same amount per hour to her friend which she used to give herself. If the selling price is reduced by 1 $ from 4.50 $ to 3.50 $, the Gross Profit per unit will decrease from 2.00 $ to 1.00 $ per unit. This gross profit per unit is still reasonable considering the large quantity of this order and this will also give a higher total profit compared to the one Janet is earning currently by selling 40 bookmarkers a week.

3)

The total gross profit Janet will make from this order will be 1.00 $ * 2000 = 2000 $. This is apart from the labour cost she will herself earn for making around 1000 units of the bookmarkers during the month.