Developing a Decision-Support Application for a Small Business
Choice Coffee of the Month is a newly-formed one-person company that markets choice coffees through a monthly subscription service. For an annual subscription fee, Coffee of the Month will send subscribers a different choice coffee, such as Colombian, Mocha Java or French Dark Roast, every month. Its founder, Martha Staunton, feels this service will appeal to coffee-loving young professional couples who like to experiment with new flavors and ideas.
Martha plans to place small ads in the back of various gourmet magazines, but is unsure of the response rate. Before she invests heavily in advertising, inventory, and office space, Martha needs to know if there is a future in this type of business and at what point it will produce a profit.
This is a classic problem for all businesses: determining what objectives must be met to produce a profit or to minimize losses. What Martha must do is utilize the managerial accounting concept of Breakeven Analysis. Breakeven Analysis establishes the breakeven point, which is the number of units that must be sold to yield no profit and incur no loss. Any units sold beyond the breakeven point will represent profit, and a sales volume below the breakeven point will put the firm at a loss.
In order to perform Breakeven Analysis, a company must examine its operating costs. Some of these costs are fixed and do not change significantly over the range of the operations activity. Variable costs, on the other hand, increase with increasing production, and decrease as production decreases.
In the case of Choice Coffee of the Month, fixed costs are Martha's rent for a one-room office-storage area ($6800 per year) and the costs of her initial advertising campaign ($3000). Martha's variable costs are the cost of purchasing the coffee, shipping costs, and ongoing advertising expenses. Martha has calculated that the cost of