Sally Marley has come to you for some help in starting her new high-end kite com

Question

Sally Marley has come to you for some help in starting her new high-end kite company. She has provided you with the following information: Sally thinks she can sell these kites for $75, and wants to know how many she must sell annually to breakeven. She is also concerned about her pricing. These are very high-end kites and could sell for more than the planned price of $75 However, Sally is also concerned about the limited market for such high-end kites. Consequently she wants you to determine the breakeven quantity if she raises the price to $90 each. With this information, and her feel for the market, Sally can decide what annual volume she well plan for. As any fledging entrepreneur would desire, Sally would like to receive a small profit from her business She has asked you to determine how many kites must she sell at the $7S and the $90 price to generate an annual profit of $6,000, before taxes? If the business is good, Salty is already looking to the future One idea is to have a celebrity endorse her product She has done some research and is fairly certain she can get a celebrity endorsement for $21,000 If she kept the price at $75, what incremental sales would be necessary to make a profit, and what sales volume would be required to achieve the $6,000 profit? A second idea is to switch from the rather plain $1.50 per yard fabric to a higher-end $4 00 per yard fabric. The more expensive fabric would be sink-screen printed with exotic designs. Sally knows that increased variable cost will decrease her margin per kite, and that she cannot afford the nicer fabric and the celebrity endorsement. if Sally uses the finer fabric what sales are necessary to breakeven? what is the incremental increase as compared to the original fabric? What sales volume would Sally need to realize her desired $6,000 profit? Prepare a report in the Quantitative Analysis approach to answer Sally's questions. Address your report to Sally Marley, in your report: 1) Define the problem: Use information from the case that was used to define this problem. 2. Develop a model: Use information from the case to develop the appropriate model(s), provide in digital format your worksheet to the instructor, 3. Acquiring the data: Although the data is already provided, describe how you think the data was acquired for this situation, 4.Testing the solution: Does the model produce results that are accurate and complete? Did you check the results by calculating some of the results by hand?, 5. Analyzing the results: What does the information you prepared in parts 1-5 tell management?

Explanation / Answer

Let x be the number of kites to be sold.

Profit = Revenue - Cost

        = Price*Qty - Cost

        = 75x - (Total Cost)

From the table, total cost = fixed + variable

= (12,000 + 10,000 + 3,500) + (3x + 6x + 7x + 4x + 30x)

= 25,500 + 50x

So, Profit = 75x - (25,500 + 50x)

              = 25x - 25,500

For $6000 profit, 6000 = 25x - 25,500

=> x = 1260

Factoring in the celebrity cost of $21,000, incremental sales = 21000/75 = 280

Total Sales volume for required profit = 1260 + 280 = 1540 Kites.

The only change from 1st idea is VC of fabric and price of kite

Profit = 90x - (25,500 + 60x)

Breakeven achieved when profit = 0, so, 30x = 25,500 or x = 850

For a profit of 6000, 6000 = 30x - 25000 => x = 1050 kites.

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