Select one product that you could make yourself. Examples of possible products could be cookies, birdhouses, jewelry, or custom t-shirts. Assume that you have decided to start a small business producting and selling this product. You will be applying the concepts of cost-volume-profit analysis to this potential venture.
Instructions:
Include tables that include the estimated fixed costs and estimated variable costs. Also show all calculations.
Questions:
1. Describe your product. What market are you targeting this product for? What price will you sell your product for? Make projections of your sales in units over each of the upcoming five years.
2. Make a detailed list of all of the materials needed to make your product. Include quantities needed of each material. Also include the cost of the material on a per-unit basis.
3. Make a list of all the equipment you will need to make your porduct. Estimate the cost of each piece of equipment that you will need.
4. Make a list of all other expenses that would be needed 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 of the expenses you have listed as being either 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 in your projection.
8. Now decide how much you would like to make in before-tax operating income ( target profit) in each of the upcoming five years. Calculate how many units you would need to sell in each of the upcoming years to meet these target profit levels.
9. How realistic is your potential venture? Do you think you would be able to break even in each of the projected five years? How risky is your venture ( use the margin of safety to help answer this question). Do you think your target profits are achievable?