05 Jun Question Mr. Lee of Red River Consume
Question
Mr. Lee of Red River Consumer Products in Winnipeg is considering a new product for his sales inventory. He has researched the market for similar products and decided that he could generate a profit if he offered the item in question at a unit selling price of $100. This price is considerably lower than the $125 for the same item his competitor has listed. Red River’s forecast volume of sales for the first year is 8000 units. The annual fixed cost for adding this product to the inventory is estimated to be $200,000.
The net price, after the standard supplier discount of 25%, plus an additional 10% for early order placement, is $60 per unit, delivered. Since the product is market–ready, this is also the unit variable cost. The supplier guarantees the products will be available for sale in store 60 days from date of order.
Under current economic conditions, the supply chain cash flow is tight. So the supplier requires payment in full upon receipt of order. In addition, the supplier is offering a cash incentive of 1% of the total order value if Mr. Lee will commit to a 25% deposit of the total order value, non-refundable, when the order is placed.
Mr. Lee is evaluating this option. He had decided to finance the purchase of this new inventory using a personal asset valued at $600,000 USD. The plan is to make a loan to his business. He prefers this alternative to bank financing and he is certain the product will generate a profit for his investment. His intention is to convert the asset to Canadian funds and invest it in two, successive 30-day GIC’s in order to accrue interest on this sum while waiting for the goods to arrive. The bank is offering a rate of 3.25% pa and the current exchange rate is 1CAD=0.900USD. He must decide whether to take the supplier’s offer or stick to his original plan and invest the full sum into GIC’s.
Evaluate this plan by answering the following questions.
What is the sales volume (in units) is necessary in order to break even?
What would be the net income at the forecast sales volume?
What volume is required to generate a net income of $100,000?
What is the unit list price of the product?
At the forecast annual sales of 8000 units at $100 per unit, what is the percent change in the net income if unit variable costs increase by 10% and the fixed cost decreases by 5%?
What is the new breakeven volume (to the nearest whole number) in the case of #5?
In the case of #5, to maintain the net income in #2, what would be the new selling price?
What is the value of the cash discount offered by the supplier?
Will Mr. Lee have enough capital to cover the total cost of goods after he converts his USD funds to CAD? Show your calculation.
What is the total interest will Mr. Lee earn on his investment after 60 days?
If Mr. Lee takes the supplier offer, what is the sum of the discount and total interest earned on the remaining investment?
At the forecast sales of 8000 units at $100 each, determine the profit per unit.
What is the contribution margin per unit?
If the contribution margin decreases, does the breakeven volume increase or decrease? Explain.
Does the contribution margin change with volume of sales? Explain.
What percentage is the markup on selling price?
What percentage is the markup on cost?
If the last 500 units are moving too slowly and if Mr. Lee decides to reduce the selling price to $75, is he covering his total cost per unit at this
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