Three graduates committed to exploring opportunities in entrepreneurship. They formed on-line retail seasonal holiday merchandise business. Kristin, one of the team members who had the financial background, gave several assumptions in terms of company’s operation cost for company’s additional profitability. A projected Income Statement gave the group confidence and they were committed to growing volume to generate a positive gross margin. But problems in cost calculation need to be tackled in order to generate the biggest profit.
2. The Issue:
For the year ended June 30, 1999, Hollydazzle’s actual performance was as follows: It had 50,000 transactions and revenues of $450,000. The company’s actual gross margin was -$53,500, or a unit cost of $-1.07. In this situation the Gross Profit is negative.
3. The questions/assumptions and answers
Assumption 1: Hollydazzle should outsource its warehousing and distribution facilities in the first year. Answer: Under the first year’s contract with MooV, I think Hollydazzle should outsource because 6% of the sales on first year is $26,640. They should also consider the experience of MooV in warehousing and distribution, which could add value as they move forward the business. In the following year, they should calculate the growth that outsourcing brings, if it is minor they should consider the building of their warehouse and distribution center.
Assumption 2: Increase Volume will not definitely improve Hollydazzle’s profitability. Answer: I have to admit that the profitability will increase when operation is within the maximum capacity. However, it is noted that maximum capacity of warehouse is 300,000 every year, if increasing the volume with no limit, there will be barely no growth in operation income.
Assumption 3: Consider the cost opportunity is crucial in making business decision. In addition, when making the decision to go into business, they need to also...