A car enthusiast is considering starting a company to design and produce body pa

Question

A car enthusiast is considering starting a company to design and produce body panels for the after- sales car market. He has determined that he will need a well-ventilated factory, and has located one for a monthly rental of S1200. He also will need to purchase an industrial oven in which to bake the finished panels. Since he does not have the cash to buy an appropriate oven our erstwhile owner has negotiated with the bank for a loan to cover the cost of an oven and its installation. The loan is to be repaid back to the bank at a rate of $1,600 month over three years (if needed for calculations, it may be assumed that interest paid will be $4,200 per annum).

Explanation / Answer

a) Calculation of total body panels to be sold to break even.

Cost of each kit

Owner;s time = 2300/120*30 = $ 575 (Assumed that he works for 8 hours a day and his salary is for fortnight. So total hours = 8 * 15 = 120 total hours)

Mould cost = $ 28 ((10*50 + 100 + 2*50)/25)

Material cost = $ 30 (2 skirts + 1 front lip + 1 rear bar + 1 spoilor)

Hourly cost = $ 325 (6.5 * 50(assume same cost as craftsman))

So, total cost = 575 + 28 + 30 + 325 = $ 958

So, Profit = 2000 - 958 = $ 1042

Now, other costs for 3 years:-

Rental = 1200 *12 * 3 = 43,200

Loan repayment = 1600 * 12 * 3 = 57,600

Utilities = 1500 * 3 = 4500

Total = 105300

So, total sales to break even = 105300/1042 = 101.05 panels per year

b) Other cost to take into account to determine this venture:-

Opportuity cost

Depreciation charges

Inspection charges (if any)

Sales charges

Marketing cost

Advertisement cost

Sales Commission etc.

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