Reference no: EM131982066

Tiffany Nadeau established and ran a small workshop that manufactured original design quality jewelry. What began as a hobby for sale in craft shows grew into a small on-line business. Later, it became a manufacturer for upscale jewelry shops in tourist locations across the country. To accommodate the greater volume, Ms. Nadeau opened a small workshop in the historic district of Petaluma, California, about 45 miles north of San Francisco. She paid the following prices for some of her raw material: Gold $1,200 per ounce, Silver $16.50 per ounce. Gold and Silver prices have been volatile making pricing difficult. She marketed these creations to gift shops across the United States in batches of 20 assorted items, for which she charged $2,975 per batch. In turn, the gift shop sold the jewelry at prices averaging eight times what they paid for the jewelry. Tiffany had a staff of 22. Twenty workers produced the jewelry. Two workers helped with shipping and cleanup. The production people were paid $30 per hour including benefits. The shipping and cleanup workers were paid $20 per hour for their unskilled labor. Jewelry production varied between a low of 34 and a high of 46 batches per week, and averaged 2,000 batches per year. Each batch cost $130 (excluding wages) to pack, ship and insure. It takes 1 hour to pack and ship one batch. The shipping and clean up staff each works 50 weeks per year for 30 hours per week. They received no benefits beyond the employers’ portion of FICA which was included in the $20. As she expanded Tiffany found it necessary to hire an outside accountant to handle payroll, taxes, and to keep the books. This cost $25,000 per year. She also engaged a production manager for $80,000 per year including benefits. Tiffany spends 20 weeks a year touring the U.S. She attends trade shows in order to sell her jewelry, and to find suppliers of the components for her products. Her travel, hotel, show fees, and food costs were $4,800 each week. Workshop rent and utilities cost her an average of $12,500 per month. Insurance including liability, workers compensation, and unemployment cost $8,500 per month. Advertising in trade journals and on Fashionista.com cost $68,000 per year. Tiffany works 30 weeks a year at designing jewelry, often working over 50 hours per week. She spends 20 weeks marketing and takes 2 weeks of vacation. The cost of raw materials averaged $1,900 per batch. It takes 20 hours of labor per batch to manufacture the jewelry. Tiffany does design work and creates the molds for the jewelry. Business was brisk, and Tiffany could easily sell every batch that she produced. But she found herself earning very little money. After paying her 45% income, social security and Medicare taxes for US and California, she found herself with almost no money to live on. That led her to ask for your help. She complained to you that she worked very hard, 50 weeks a year, but ended up broke and frustrated. Tiffany said that Petaluma was expensive even though home prices were less than half of what they were in San Francisco, some 50 miles to the south. Reasonable homes sold for $500,000 to $2,000,000. These were about 7 times the price of homes in Croydon, New Hampshire where her sister lived. With property taxes and insurance, Tiffany thought that she needed at least $10,400 per month for her mortgage payment. That payment was far beyond what she can afford. She would need $20,000 per month after tax to afford the mortgage and have enough left for a moderate lifestyle. You agreed to analyze her business operations and to advise her how to reach her goal of earning $240,000 per year, after taxes. After some calculation and some thought, you conclude that Tiffany has to increase her revenues, perhaps by achieving greater volume, or perhaps by raising her selling price. Write a short report directed to Ms. Tiffany Nadeau with your recommendation on how to increase revenue, supported with a pro-forma contribution income statement which incorporates your recommendations.