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Homework answers / question archive / Dorothy Dickins has £50,000 in the bank and is considering setting up a new handbag business
Dorothy Dickins has £50,000 in the bank and is considering setting up a new handbag business. She has arranged to take a lease on a building at £7000 per annum which will need to be paid in advance. She will also need to purchase a van for £12,000. which is expected to last five years and will be written off by the straight line method over the five years. She has two options for her business: (i) Make the handbags. She would also need to buy machinery for making the handbags at a cost of £35,000. This machinery is expected to last ten years and will be written off by the straight line method over the ten years. There would also be other fixed costs of £8,700 per annum. The materials for each handbag would cost £6 and labour costs would be £7 per handbag. (ii) Buy in the handbags at a cost of £20 each. There would also be other fixed costs of £5500 per annum. Depending on her choice she would need to buy in either the stock or the materials for 100 handbags at the outset. She is anticipating that her annual sales will be at least 1500 bags but it could be higher or lower. The handbags would sell for £45 each." "Required: (a) The initial investment needed before she can start, for both options. (b) The break-even level of sales per annum in terms of the units sold and the value in money, for both options. (c) The annual profit or loss which results from the following annual sales, for both options: (i) 500 (ii) 1000 (iii) 1500 (d) The sales level which gives the same profit under both options and calculate this profit. (e) Advise Dorothy on which of the options she should choose taking into consideration that she only has £50,000 cash in the bank."
