1) You have just finished college and are now looking for a job. Because all you did in college was sleep, drink and party, however, no one will hire you. Since you can’t get a job in your major, you have decided to play to your strengths and open a party school. For $200, you will teach college students how to party and have fun. You call this business “Party with a Smarty.” You figure you won’t have much of an initial investment, but you find out that you have to rent a large room for people to practice partying in at a cost of $2,000 a month. Your friend is a DJ and will charge you $1,000 per month. You have decided, at least for now, to rent the furniture, and that will set you back another $200 per month. Advertising will run right around $300 for ads in the Chronicle and in the college papers.
The $200 that each student pays covers 4 parties and pays for all drinks and food. You estimate that each student will have an average of 2 drinks at each party and will eat 2 hors d’oeuvres per party. You are paying a caterer/bartender who will charge you a per-person cost of $3 per drink and $1.50 per hors d’oeuvre. You also are going to, at least for now, pay an outside sales person to sell your party plan to students, and the sales person’s commission will be $64 per student, whether he sold them the plan or the student came to you on his/her own.
What you want to know is, how many students must you sell tickets to in one month in order to make your needed earnings of $2,500 a month?
2) You are now a grown-up and have 2 children: Nicole, aged 6, and Yuri, aged 8. They want to sell lemonade in the front yard for $.50 a glass. You agree that this would be a good experience in entrepreneurship, and tell them that you will loan them the money but they have to pay for their materials and equipment (the labor, however, is free.)
The lemonade mix costs $4.79 a package, and will make 100 glasses of lemonade. The sugar that you must add cost $2.21 for 5 pounds. You will need 2 ½ cups for every pitcher of lemonade, and you estimate that a pitcher will be about 10 glasses. You also calculate that it will take all 5 pounds to make 100 glasses.
The lemonade stand itself is made out of plywood, screws and paint that you paid about $25 for.
a) How many glasses will your children have to sell to pay you back for the plywood and cover their variable costs?
b) What if your kids wanted to make a profit of $50? How many glasses would they have to sell?
3)You have changed your name to Norman Bates, and you own the Bates Motel in a busy area of Houston, Texas. While business is doing pretty well, it could be better. In a 100-room motel, your occupancy rate is 90%. Your average rate per night is $65, and your variable costs are $15 per room. However, your fixed costs are $75,000 per month. (If you figure occupancy rate at 90% x 100 rooms x 30 nights, you are selling 2700 room nights.)
You are considering raising your rates to $75 per night. If you do this, you have calculated that your occupancy rate will decrease to 80%. Is this a good move for you.?
4) You are a car thief. You steal late-model cars in a major U.S. city and drive them across the border to sell them for an average price of $10,000. You are enrolled in Ms. Smith’s managerial accounting class and you want to know if crime, indeed, does pay. So you calculate your costs thus: 1) on average, you drive 2,000 miles from start to destination. Your gas cost over the past year has averaged $3.00 a gallon, and most of the cars you drive get about 10 miles to the gallon. 2) each trip averages about 5 days. Your average cost per day of food and lodging is $30. 3) tips and bribes cost you about another $120 per job. 4) your major other cost comes from the “paint and body work” you must have done at the beginning of the job – your buddy Slade Slick charges you $3,500 per “conversion.” 5) you also incur a “hiding out” cost between jobs – you stay in motels in the U.S. that average about $50 a day and your food cost comes to around $20/day. You spend about 9 days between jobs in your hideout mode.
5) your only other cost is lawyers’ fees – in the last year, you had to pay a lawyer $125,000 to defend you against felony theft charges. You estimate that you will probably caught, on the average, of once a year.
What is your breakeven point in number of cars? How many cars can you steal in one year if you take no vacation time?
You want to know if you should keep stealing cars or whether you should go to work for your brother, Honest Abe, for $10/hour.
5 You are now older and wiser. Your social group, the Gray Goths, is having a fund-raiser and you are in charge of accounting for the event.
In the past, the club has charged $25 a ticket for the event. Food and drink costs have averaged about $15 per person. The expense for the rental of the hall is $1500, and the cost for the police protection has been $500. The club has sold around 300 tickets on average.
Your treasurer, Larry Shmoe, who thinks he knows a lot about business, thinks you will be able to sell about 400 tickets by lowering the ticket price to $20. On the other hand, your publicity chair, Stella Roo, says that if the club shells out around $500 for advertising, they can raise sales by 20%.
Which, if either of these options, should you choose?
6. You are really old. You started a small garage-sale business after you retired, and in the first year, you have the following earnings and expenses: $25,000 in sales, $9,000 in cost of merchandise; $1,000 in gasoline and depreciation on your old pick-up truck, and $5,000 in rent on the storage for your junk. You have decided that the gasoline/depreciation expense is probably a variable expense. Since the storage shed that you rent has much higher capacity than you are using, now, you are calculating what would happen if you expanded your efforts. Without preparing a new income statement, how much net income would you make if you are able to quadruple your sales next year? (hint; if your sales quadruple, they are increasing by 300%.)
Your friend, Mo, has decided to get into the business as well; his strategy is to leverage his fixed expenses. He rents storage space for $10,000, and spends little to nothing on his merchandise, mostly just picking up stuff that people are throwing out at the curb and combing through old garbage at the dollar stores. His total variable expenses are just $5,000. With a quadrupling of his sales of $25,000, how much would his net income be in the second year?