Reference no: EM132773030

Jodie, the owner of The Gift Post is concerned that one of her product lines (Himalayan salt lamps) is not generating enough sales and that the gross profit margin is not meeting the benchmark that she has set for this product. Jodie is considering removing this line of product from her product mix and is exploring an alternative product - a new brand of Jigsaw puzzle that is not currently available in the market. Market research has indicated that jigsaw puzzles have become extremely popular during the lock down period caused by Covid-19 and she is hoping that she can take advantage of this increase in demand for this product. Before she makes her final decision, Jodie has asked you to provide an analysis and recommendation as to whether bringing jigsaw puzzles into the product mix is of the business is a viable option.

Jodie has conducted some initial market research and has estimated that she could sell these puzzles for $45 each. Jodie has explored purchasing the product overseas, but would ideally like to buy locally to support local small businesses.

The estimated variable costs per unit to purchase the puzzles overseas are as follows;

Cost of product $12.20
Freight cost $ 6.10
Taxes and Duties $ 2.25

• It is estimated that the business will need to spend an additional amount of $2,500 on a marketing campaign to promote the product. This campaign will focus on the existing customer base initially.
• Fixed costs in the amount of $15,000 have been allocated to this new initiative.
• Jodie has asked you to undertake a cost-volume-profit analysis of this opportunity.

Problem a) There is a small manufacturer located in Williamstown who can make the puzzles that Jodie is after, rather than having to buy overseas. This would eliminate the costs associated with taxes and duties and a reduction of freight costs by 30% on initial estimates. However, there would be an increase to the cost of the product by 25%. This price will be firm for the next three (3) years. Calculate the breakeven point under this option and briefly discuss which option would be preferred.