Lorenzo, the owner of a local poster shop, comes to you for help. While his shop has been breaking even for the past two years, it has not been able to generate a profit. For him to keep the shop open, he needs to earn at least $12,000 in operating income next year.

You agree to help Lorenzo and ask him for some current information about his products' selling price and costs. You tell him you will work through some possible scenarios that might involve changing his sales price to generate the number of units sold needed to reach his target profit.

Lorenzo shares the following information with you as you ponder different scenarios to help your client.

Selling price $7.50

Cost for paper, per unit $0.70

Cost for printing, per unit $1.10

Cost for film, per unit $0.60

Staff salaries $48,000.00

Other operating costs $12,120.00

Using Lorenzo's data and proper Excel formulas, first, plan to get an understanding of Lorenzo's financial situation based on breakeven. Then look at the following five pricing scenarios:

Lower the selling price by 10% to increase sales volume by 5%.

Advertise on radio and social media for a combined cost of $1,000 to increase volume by 10%.

Use a more affordable paper on which to print the posters (available for $0.60 per unit), in combination with a less-expensive film to coat the surface of the poster (available for $0.40 per unit).

Instead of paying the salespeople a fixed salary, move to a commission-based compensation plan (save $20,000 in salary; incur $1.50 per unit sold commission), which should increase sales volume by 20%.

Advertise on radio and social media for a combined cost of $1,000 and, instead of paying salespeople a fixed salary, move to a commission-based compensation plan (save $20,000 in salary; incur $1.50 per unit sold commission), which could increase sales volume by 25%.

A few days later, Lorenzo calls back and says he realizes he didn't take into account any tax consequences. He lets you know that he estimates his tax rate to be about 25% and asks if you could please factor that into the various options. He is open to raising the price of his posters if you think that is a viable option.

He also lets you know that he's been approached by a potential client inquiring about a special order, and he wants you to advise him on whether to accept the order. The client wants 500 custom posters for $7 per poster. The posters will require a different type of paper that will cost $0.10 more per poster. The order will also require Lorenzo to pay an extra $1000 in employee costs.

Per Lorenzo's request, you also decide to see what effect a price increase might have on Lorenzo's position. You have noticed that Lorenzo's is one of the only poster shops in the area, and customers may be willing to pay more, and a higher price may even signal higher quality. Though, there are no guarantees that the market will accept the price increase. Lorenzo is looking at increasing the sales price to $9.25.

Provide analysis of all options and present your recommendations.

Transcribed Image Text:A B C D E Lorenzo's Data Selling price Variable Costs [Insert value] Cost for paper, per unit [Insert value] Cost for printing, per unit [Insert value] Cost for film, per unit [Insert value] Total Variable Costs Contribution Margin Fixed Costs [Insert value] [Insert value] Staff salaries [Insert value] Other operating costs [Insert value] Total Fixed Costs [Insert value] Breakeven Sales Units [Insert value] Target Profit Goal [Insert value]
Transcribed Image Text:B E F Lorenzo's Poster Shop Contribution Margin Income Statement Sales Less Variable Costs: Paper Printing Film Total Variable Cost: Contribution Margin Less Fixed Costs Operating Income [Insert formula] [Insert formu [Insert formu [Insert formu [Insert formula] [Insert formula] [Insert formula] [Insert formula] H

Question

Lorenzo, the owner of a local poster shop, comes to you for help. While his shop has been breaking even for the past two years, it has not been able to generate a profit. For him to keep the shop open, he needs to earn at least $12,000 in operating income next year.

You agree to help Lorenzo and ask him for some current information about his products' selling price and costs. You tell him you will work through some possible scenarios that might involve changing his sales price to generate the number of units sold needed to reach his target profit.

Lorenzo shares the following information with you as you ponder different scenarios to help your client.

Selling price	$7.50
Cost for paper, per unit	$0.70
Cost for printing, per unit	$1.10
Cost for film, per unit	$0.60
Staff salaries	$48,000.00
Other operating costs	$12,120.00

Using Lorenzo's data and proper Excel formulas, first, plan to get an understanding of Lorenzo's financial situation based on breakeven. Then look at the following five pricing scenarios:

Lower the selling price by 10% to increase sales volume by 5%.
Advertise on radio and social media for a combined cost of $1,000 to increase volume by 10%.
Use a more affordable paper on which to print the posters (available for $0.60 per unit), in combination with a less-expensive film to coat the surface of the poster (available for $0.40 per unit).
Instead of paying the salespeople a fixed salary, move to a commission-based compensation plan (save $20,000 in salary; incur $1.50 per unit sold commission), which should increase sales volume by 20%.
Advertise on radio and social media for a combined cost of $1,000 and, instead of paying salespeople a fixed salary, move to a commission-based compensation plan (save $20,000 in salary; incur $1.50 per unit sold commission), which could increase sales volume by 25%.

A few days later, Lorenzo calls back and says he realizes he didn't take into account any tax consequences. He lets you know that he estimates his tax rate to be about 25% and asks if you could please factor that into the various options. He is open to raising the price of his posters if you think that is a viable option.

He also lets you know that he's been approached by a potential client inquiring about a special order, and he wants you to advise him on whether to accept the order. The client wants 500 custom posters for $7 per poster. The posters will require a different type of paper that will cost $0.10 more per poster. The order will also require Lorenzo to pay an extra $1000 in employee costs.

Per Lorenzo's request, you also decide to see what effect a price increase might have on Lorenzo's position. You have noticed that Lorenzo's is one of the only poster shops in the area, and customers may be willing to pay more, and a higher price may even signal higher quality. Though, there are no guarantees that the market will accept the price increase. Lorenzo is looking at increasing the sales price to $9.25.

Provide analysis of all options and present your recommendations.

A
B
C
D
E
Lorenzo's Data
Selling price
Variable Costs
[Insert value]
Cost for paper, per unit
[Insert value]
Cost for printing, per unit
[Insert value]
Cost for film, per unit
[Insert value]
Total Variable Costs
Contribution Margin
Fixed Costs
[Insert value]
[Insert value]
Staff salaries
[Insert value]
Other operating costs
[Insert value]
Total Fixed Costs
[Insert value]
Breakeven Sales Units
[Insert value]
Target Profit Goal
[Insert value]

B
E
F
Lorenzo's Poster Shop
Contribution Margin Income Statement
Sales
Less Variable Costs:
Paper
Printing
Film
Total Variable Cost:
Contribution Margin
Less Fixed Costs
Operating Income
[Insert formula]
[Insert formu
[Insert formu
[Insert formu
[Insert formula]
[Insert formula]
[Insert formula]
[Insert formula]
H

Accepted Answer

Part 2: Explanation:Step 1: Calculate Breakeven Sales Units and Target Profit Goal:  - Breakeven…