Questions and answers relating to Cost Accounting

Q1.

The volume of books that One.com, an online book retailer, needed to sell in order to break-even in July 2014 was 10,000 units. Fixed expenses per month (salaries and warehousing) are $60,000. The selling price per book is $10. In August 2014, One.com decides to acquire author-signed copies of all books. Because of this, variable costs per book in August are expected to increase by 25% over the previous month. What is the breakeven volume for August 2014, assuming the price per book does not change? Please present your workings clearly.

QUESTIONS 2 and 3 are based on the following business situation:

Peter Rossi is considering starting a company called DollCo, which would be in the business of making and selling cute porcelain dolls. To investigate demand, Peter makes some sample figurines and hires Marketalpha, a NY-based firm, to conduct some marketing research. Marketalpha suggests that DollCo should sell its products in three states only: NY, NJ and CT. It determines that DollCo’s market share (by volume) in the first year of operation will be 0.3% in NY, 0.5% in NJ and 0.1% in CT. Peter thinks that he should go into business, and decides to follow Marketalpha’s recommendations. He has turned to you to help him work out a business plan.

DollCo plans to manufacture the dolls in a rented manufacturing facility (monthly rent is $2,000) and to lease an assembly machine for $66,000 per year. Additionally, it will cost DollCo $3 per doll in materials and labor. Peter plans to sell the dolls through Amazon.com. Amazon will buy the dolls from DollCo for $18 per doll and sell them to final consumers to make a 15% margin per doll. Per the arrangement with Amazon, DollCo will be responsible for delivering the doll to the final consumer. DollCo will incur a cost of $6 per doll, to be paid to a shipping company for this service.

Other than those mentioned above, there are no costs (depreciation, taxes, etc.) or revenues associated with the business. For the sake of simplicity, ignore all costs that DollCo would have to incur after the first year, and all revenues that the business would generate after the first year. Marketalpha estimates the total market size of dolls to be 2 million units per year in NY, 1 million units per year in NJ, and 3 million units per year in CT.

Q2.

What is the estimated sales volume (in units of dolls) for DollCo in the first year based on the market research? Please present your workings clearly.

Q3.

What is the breakeven volume (in units of dolls) for DollCo for the first year? Please present your workings clearly.

Q4.

Organic foods is one of the fastest growing industries in the US. Consider a 32-oz cup of organic yogurt which consumers buy from supermarkets at an average retail price of $4.00. Dannon, a prominent player in the industry, manufactures organic yogurt in various cup sizes and ships all its products to organic foods distributors. Distributors then deliver the products to individual supermarkets. For a 32-oz cup of organic yogurt, the typical distributor margin is 9% and supermarket margin is 35%. If the variable cost of production of a 32-oz cup is $2.00, what is the unit contribution (in $ per cup) earned by Dannon? Please present your workings clearly.

Hint: Each agent’s margin is interpreted as a percentage of the selling price of that agent.

Q5.

Two.com, a very successful online retailer of diapers and other baby products, estimates that each of its existing consumers makes 10 purchases per year. 60% of these purchases are for “Big Diapers” and the remaining are for “Small Diapers”. The unit contribution per purchase is $2.00 for Big Diapers and $0.20 for Small Diapers. Each year Two.com experiences a churn of 90% of its customer base (or 90% of its customers never buy its products again), presumably because its products are not relevant for babies over a certain age. What is the maximum (in $ per customer) the firm should be willing to spend on acquiring a customer? Use the concept of customer lifetime value to answer this question. Assume a lifetime of three years, and negligible marketing communication costs. Also assume that cash flows do not need to be discounted in time.