Assignment 3

A7-81. CVP for a product Select a product that you could make yourself. Examples of possible products could be cookies, birdhouses, jewelry, or personalized t-shirts. Suppose you have decided to start a small business that produces and sells this product. You will apply the concepts of cost-volume-profit analysis to this potential business. Basic Discussion Questions

1. Describe your product. What market is this product aimed at? At what price will you sell your product? Project your unit sales for each of the next five years.

2. Make a detailed list of all the materials needed to make your product. Include required quantities of each material. Also include the material cost per unit.

3. Make a list of all the equipment you will need to make your product. Calculate the cost of each piece of equipment you will need.

4. Make a list of all the other expenses that would be necessary to create your product. Examples of other expenses would be rent, utilities, and insurance. Estimate the cost of each of these expenses per year.

5. Now classify all the expenses you have listed as fixed or variable. For mixed expenses, separate the expense into the fixed component and the variable component.

6. Calculate how many units of your product you will need to sell to break even in each of the five years you have projected.

7. Calculate the margin of safety in units for each of the five years of your projection.

8. Now decide how much you would like to earn in pre-tax operating income (target profit) in each of the next five years. Calculate how many units you need to sell in each of the next few years to meet these target profit levels.

9. How realistic is your potential company? Do you think you could break even in each of the five projected years? How risky is your company (use the margin of safety to help answer this question). Do you think your target earnings are achievable