Part 1.
Newspaper ad | $120 per month |
Social media manager | $100 per month; $1 per job scheduled |
Payment collection | $0.75 per job |
Gas | $4.00 per job |
Considering his analysis of similar services and to keep thingssimple, W.T. plans to price all jobs the same and charge $15 perjob. Because of this flat rate, he anticipates he’ll likely need tocreate different types of “jobsâ€. For example, purchasing a list ofitems at the grocery store would be one job, while a bundle of 2-3small errands such as picking up dry cleaning and prescriptions,might be considered one job. We’ll deal with those details later.For now, assume that all jobs are priced at $15 each and all havethe associated variable expenses listed above.
Because this will be a new business, W.T. knows business willlikely be slow at the beginning. Complete the following tableassuming W.T. completes 10 jobs in a single month.
Item | Per Job | Total (10 jobs) | Computations |
Sales | $Â Â Â Â Â Â Â Â Â Â Â Â | $ | |
Less: Variable Cost | $ | $ | |
Contribution Margin | $Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â | $ | |
Less: Fixed Cost | $Â Â Â Â Â Â Â Â Â Â Â | $ | |
Gross Margin | $ | $Â Â | |
Part 2
Yikes! He’ll clearly have to complete more than 10 jobs. W.T.needs to be able to at least cover his costs. Still using thepreliminary estimates provided, how many jobs would W.T. have tocomplete to break even? What would that be in dollars?
(1) Contribution margin:
Sales price per job | $ |
Less: Variable costs per job | $ |
=Contribution margin per job | $ |
(2) Break-even point in units:
Fixed costs | = | $ | = | jobs |
Contribution margin per job | $ |
Note: W.T. won’t be paid if he only completes part of a job.
(3) Break-even point in sales:
Break-even point in jobs | x | Sales price per job | = | Break-even point in dollars |
| x | $ | = | $ |
Check your work:
Total sales | $ |
Less: Total variable costs | $ |
= Total contribution margin | $ |
Less: Total fixed costs | $ |
= Total profit | $ |
Part 2
Yikes! He’ll clearly have to complete more than 10 jobs. W.T.needs to be able to at least cover his costs. Still using thepreliminary estimates provided, how many jobs would W.T. have tocomplete to break even? What would that be in dollars?
(1) Contribution margin:
Sales price per job | $ |
Less: Variable costs per job | $ |
=Contribution margin per job | $ |
(2) Break-even point in units:
Fixed costs | = | $ | = | jobs |
Contribution margin per job | $ |
Note: W.T. won’t be paid if he only completes part of a job.
(3) Break-even point in sales:
Break-even point in jobs | x | Sales price per job | = | Break-even point in dollars |
| x | $ | = | $ |
Part 3
That number of jobs seems doable to W.T. But the whole reasonhe’s going into business is to make a profit. Otherwise, he’ll endup using all of his savings and he definitely doesn’t have enoughto last the entire school year. W.T.’s parents help him cover anumber of his expenses, but he needs to generate at least $400 permonth to avoid having to use any savings.
How many jobs would W.T. need to complete to earn $400? Whatwould that be in dollars?
(1) Sales volume to earn desired profit (in units):
Fixed costs + Desired profit | = | $ | + | $ | = | jobs |
Contribution margin per job | Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â $ |
Remember: W.T. can’t complete just part of a job.
(2) Sales volume to earn desired profit (in dollars):
Required units | x | Sales price per unit | = | Sales in dollars required to earn desired profit |
| x | $ | = | $ |
Check your work:
Total sales | $ |
Less: Total variable costs | $ |
= Total contribution margin | $ |
Less: Total fixed costs | $ |
= Total profit | $ |
Question: Why isn’t the profit exactly $400?
