Case Study 3 Constructed

case study 1Vivian Lopez and Loren San will be opening a pastry store called Tasty Desserts. They are opening in two weeks and have still not decided how much to charge for their cakes and how much they should spend on advertisements and promotions, The following information is available:Tasty Dessert’s variable costs per cake $10Tasty Dessert’s fixed costs for the year $12,500 Maximum production capacity for the year 5000 cakesTasty Dessert’s selling price per cake?Advertising budget?Competitor’s selling price per cake (offer similar cakes as Tasty Dessert’s) $20The two owners had the following discussion regarding the selling price and advertising budget: Vivian: Opening day is in two weeks! Loren, we really need to figure out how much we’ll be selling our cakes for and our advertising budget.Loren: As a new store, I think we should charge the same rate as our competitors and advertise our store on the radio and local review blogs. I anticipate that these advertising expenses will increase our fixed costs by $3,000.Vivian: Well, I think the best way to attract customers is to sell our cakes cheaper than anyone else. I’m thinking we should charge 10% lower than our competitor’s rate. As for advertising, I don’t think we need to spend money on advertisements at all. We can simply create a Facebook group and invite a bunch of friends and families. This way, we will generate more sales. In fact, I think we can potentially increase sales by 1,500 cakes.Loren: I agree that we will probably sell more cakes if we charge 10% lower than our competitors. However,I don’t think we will be able cover our fixed costs if we reduce our prices. We should also be concerned with breaking even as quick as possible.

case study 1question) Whose suggested strategy should be recommended? Assume that 5,000 cakes will be sold. Constructed Response Answer

Gordon Sparks Ltd. sells ergonomic chairs. The company implemented a new bonus structure for all of their managers. If net income increased from the previous year, managers would be rewarded with 0.5% of the increase in net income.

In January of last year, Mingle Nicholson was hired as the manager of the marketing department. As the marketing manager, he was responsible for seeking external opportunities, managing budgets and understanding the current and potential customers. Every three or four days, Mingle would meet with the sales manager, Logan Freidman. The meeting was usually about past sales, and whether there were changes to the selling strategy. This information was extremely important to Mingle, since he was responsible to ensurethe marketing objectives are aligned with the sales objectives.

During the year, Mingle made several changes to Gordon Sparks’ marketing strategy. Mingle created a set of popular commercials, which were a complete success. Each commercial reached over 5,000,000 views on YouTube.

However, by the end of that year, Mingle realized that he did not receive a bonus from the company because the company’s overall financial performance remained the same. 

case study 2 question)Discuss the appropriateness of the company’s bonus policy.

Case Study 3 Constructed Response AnswerHocus Pocus Company wants to increase sales by adding a new product line. The company is considering three different projects. However, its capital budget is limited to $1,500,000. In addition, the company requires a rate of return of 10%. The information concerning the three product lines is given below.

                                                        Broomsticks            magic wands       crystal balls

Net initial investment                    $1,70,000                 $983,000             $2,210,000

Budgeted income statement

 for the next five years :

sales                                                $500.000               $450,000                  $650,000

cost of goods sold                         80,000                    50,000                      32,000

gross margin                                   420,000                  400,000                     618,000

marketing and administrative     100,000                  130,000                    22,000

expenses

net income*                                        ?                             ?                                   ?

* assume all amounts stated on the budgeted income statement are cash items.

Que a)  Determine the net present value for each project assuming all cash flows cease after five years.

case study constructed response answer   a       

Que b) why project should Hocus Pocus invest in and why ?

case study constructed response answer b

Que) c   If Hocus Pocus had a capital budget limit of 2,300,000 how should they invest it  ??

case study constructed response answer c   

references required