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A lamp shop has rented a sales area in Barberà del Vallès for € 3,000 monthly. In the store there must be 3 employees always. Because of the opening hours, The Company requires two labor shifts of 8 hours each. That means they need 6 employees. The monthly salary for each one of them is € 1,000. The store pays its suppliers an average of € 100 per lamp. The retail price of the lamp is € 120.
In this example FC= € 3,000 + € 6,000 = 9, Unit variable cost = € 100 P = € 120 per lamp
List the production factors used by the store: They are the shop (location), the labor (employees) and the raw materials (here, the lamps).
Determine how many lamps must be sold to reach the break-even point: Break-even point: FC/ (p-CV) q= € 9,000/(120-100) = 450 lamps CF=€ 3,000+ € 6,000= € 9,
What are the monthly expenses of the shop? € 3,000+ € 6,000= € 9,000 monthly expenses (fixed) and then the raw materials
Calculate the monthly income of the store. It depends on the sales. Her they do not tells us the sales. We will work with the break-even point and with a larger volume (30 lamps per day or 900 lamps per month) (if we sell 450 lamps) I= p x q= € 120 X 450 units of lamps (break-even point) = € 54,000 of income (if we sell 900 lamps) I= p x q= € 120 X 900 units of lamps = € 108, 000
What are the unit cost and the margin (gross and net) per lamp? unit cost= € 100 price-cost= € 120- € 100= € 20 gross margin per lamp net margin per lamp? If we use break-even volume we know the profits are zero. So, net margin = 0 If we use 900 lamps per month net margin per lamp = (Revenues – TC ) / 900 = (€ 108, 000 – € 90,000 - € 9,000 ) / 900 = € 10
What is the individual added value of this production activity? € 120 - € 100 - (€ 3,000/450)= 13.33 added value of this production activity
What should be the daily productivity (sold units) for each employee? (450 lamps /30 month’s days) / 6 employees= 2,5 lamps for each employee, daily productivity. 450/30= 15 units of lamps per day. If we sell 900 lamps, it will be double productivity.
B. The payments to the employees and the office rent are done at the beginning of the month. Suppliers provide lamps every day and the store pays them in cash the same day. Customers pay in cash too. b1) Indicate what should be the minimum initial funding needed for starting the production. Rent the local: € 3,0 00 Employees: € 6,000 Total: € 9,
b2) If those funds are provided by the business owner, what would be the evolution of the current account balance throughout the month? What is the pattern of investment (assets) and financing (net assets and liabilities) of the store throughout the month? Express the result and the balance of productive activity for any day of the month (t).
P&L (t) Using the break-even production level
Activity for any period (t)
Revenues (120 x 15) t = € 1,800t
Consumption of raw materials
(100 x 15) t = - € 1,500t
Consumption of rent ( 3,000 / 30 ) t = - € 100t
Labor Costs ( 6,000 / 30 ) t = - € 200t
=Profits € 0 *t = € 0
Balance sheet at day (t)
Assets
Rent of the building 3,000-(3,000/30)t= 3,000-100t
Salary advances 6,000- (6,000/30)t= 6,000-200t
Checking account (120 – 100) x 15 t = 300t
Equity
Contribution entrepreneur € 9,
Profit € 0 *t
Total € 9,000 Total € 9,
P&L (t) Using the production level of 900 lamps per month
Activity for any period (t)
Revenues (120 x 30) t = € 3,600t
Consumption of raw materials
(100 x 30) t = - € 3,000t
Consumption of rent ( 3,000 / 30 ) t = - € 100t
Labor Costs ( 6,000 / 30 ) t = - € 200t
=Profits € 300 *t
4,500 funding is done by the bank, 4,500 x 0,02= € 90 with a monthly interest rate of 2%) The bank also requires a minimum return of 1% per month for its money. So VK = 45 + 45 = 90. So even if we change the contribution, the social cost is the same if VK is not affected and remains the same for the entrepreneur and for the bank. However, the profit is going to be affected because now we must pay the interest!! And in the case of producing only 450 lamps we move into losses. That does not happen with 900 lamps.
P&L (t*30)
Activity for the month
Revenues 1,800 x 30= 54,
Consumption of raw materials 1,500 x 30= -45,
Consumption of rent 100 x 30= -3,
Labor Costs 200 x 30= -6,
Interest payment (financial expense) 4,500 x 0,02= -
=Profit -
Balance sheet (t=30) and selling 450 lamps.
Assets
Rent of building 3,000-(3,000/30)*30= 0
Salary advances 6,000- (6,000/30)*30= 0
Checking account 300*t = 9,
Equity
Contribution entrepreneur € 4500 Profit = - 3*t = -
Liabilities
Bank contribution € 4500 + 90
Total € 9, 000 Total € 9,
Balance sheet (t=30) in the case of selling 900 lamps.
Assets
Rent of building 3,000-(3,000/30)*30= 0
Salary advances 6,000- (6,000/30)*30= 0
Checking account (120 – 100) x 30t = (600)t=18,
Equity
Contribution entrepreneur € 4500 Profit = 300t - 3t = 8,
Liabilities
Bank contribution € 4500 + 90
Total € 18, 000 Total € 18, 000
D. Finally, the lamp company is organised as a limited liability company. Following the part c), the capital covers for half of the needed funding and the other half is obtained from the bank loan. Consider now a scenario where the sales of the company are lower than expected, more specifically, sales reach 10 lamps per day. d1) In this scenario, what would be the balance at the end of the month?
P&L (t) Using sales of 10 lamps per day
Activity for any period (t)
Revenues (120 x 10) t = € 1,200t
Consumption of raw materials
(100 x 10) t = - € 1,000t
Consumption of rent ( 3,000 / 30 ) t = - € 100t
Labor Costs ( 6,000 / 30 ) t = - € 200t
=Profits € -100 *t
Balance sheet at day (t) and sales of 10 lamps per day
Assets
Rent of the building 3,000-(3,000/30)t= 3,000-100t
Salary advances 6,000- (6,000/30)t= 6,000-200t
Checking account (120 – 100) x 10 t = 200t
Equity
Contribution entrepreneur € 4 , 500
Profit € (-100-3)*t
Liabilities
Bank contribution € 4,500 + 3 *t
Total € 9,000 - 100t Total € 9,000 - 100t
Balance sheet at the end of the month with sales of 10 lamps per day
Assets
Rent of building 3,000-(3,000/30)*30= 0
Salary advances 6,000- (6,000/30)*30= 0
Checking account (120 – 100) x 10t = 200t= 6,
Equity
Contribution entrepreneur € 4, Profit = - 103*t = € - 3,
Liabilities
Bank contribution € 4,500 + 90
Total € 6,000 Total € 6,
