Evaluate break-even evidence, contribution, margin of safety and risk to justify decisions in IB Business Management HL cases.
Jill Anderson operates a restaurant. Although Jill’s meals are viewed as being excellent quality, sales are slowing.
Jill Anderson
Jill Anderson operates a restaurant. Although Jill's meals are viewed as being excellent quality, sales are slowing. Jill is considering replacing existing meals with gluten-free meals. The following financial and forecast information is for the month of May 2018. Jill's restaurant can only produce either existing or gluten-free meals.
Table 1: Existing meals
Table 2: Estimated costs and price if Jill produces the gluten-free meals
A local gluten-free manufacturer, which is not part of Jill's existing supply chain, has offered to supply already prepared gluten-free meals at per meal. Jill is unsure whether to make or buy the gluten-free meals.
Calculate:
the total contribution of existing meals sold per month (show all your working);
the contribution per unit of a gluten-free meal if Jill decides to buy-in the gluten
free meals (show all your working).
Sock Paradise (SP)
After conducting primary market research, Pam opened Sock Paradise (SP), which sells colourful socks. SP operates a retail stall in a large department store and sells online through its own website.
Table 2 shows selected financial data for SP for 2020.
Table 2: Selected financial data for SP for 2020
At the end of 2020, the department store told Pam that it would increase rent by $14000 per year starting on 1 January 2021. Pam forecast total sales for 2021 as 18000 pairs of socks; other costs and prices were forecast to remain unchanged.
Using the selected financial data in Table 2, calculate for SP for 2020:
the break-even level of output (show all your working);
the margin of safety (show all your working);
the net profit (show all your working).
EcoCycle
Dan Perdue is a sole trader who sells bicycles. His unique selling point (USP) is bicycles that are made from recycled materials using environmentally friendly processes. Dan's customers are willing to pay high prices for these types of bicycles, and they have a price inelastic demand. Currently Dan purchases the bicycles from GreenRide, a local manufacturer. GreenRide bicycles are well made, rarely have defects, and are well known to environmentally conscious cyclists. The income elasticity of demand for Dan's bicycles is greater than one.
Table 1: financial data for Dan's bicycles, for 2015:
The economy is forecasted to grow in the upcoming years. To take advantage of the growth potential, Dan is considering forming a partnership with David Brown, a skilled mechanic who knows how to manufacture bicycles. Both Dan and David would be equal partners and split the profits. The partnership will begin on 1 January 2016 and would trade under a newly created brand, EcoCycle. Recycled materials and environmentally friendly processes would be used to manufacture all the EcoCycle bicycles.
Table 2: forecasted financial data, for EcoCycle bicycles, for 2016:
Dan, however, conducted primary market research which indicated that respondents were only willing to pay a much lower price for the untested, unknown brand EcoCycle.
Using Table 1, calculate for Dan, for 2015:
the break-even number of bicycles (show all your working);
the total profit (show all your working).
Using Table 2, for the new EcoCycle bicycles, for 2016:
calculate the price that Dan must charge to earn a target profit of (with sales of 200 EcoCycle bicycles) (show all your working);
using your answer to part (i), and assuming that Dan reduces this price by 5 %, calculate the number of bicycles EcoCycle must sell to still have a target profit of .