Reference no: EM132927717

Rhiannon started a new business last year making and selling rings. She buys stones which have been cleaned and coated for $3 apiece (on average). Other materials cost about $2 per ring. Rhiannon sells her rings online for $15 each and $20 each in person. She realizes that her customers could shop online to save money, but they would still need to pay for shipping (flat rate of $10 per order which is about $2 higher than her typical shipping cost). She doesn't market all her creations online, keeping the best pieces as "treats" for regular customers. In her first year, Rhiannon sold 1,100 rings of which 60% were in person- she estimates that online shoppers buy three rings per order on average, while in-person shoppers buy two per visit. She is looking for feedback on this sales strategy. Also, Rhiannon has heard of cost-volume-profit analysis and she is wondering how things look for her currently (and maybe in the future) from a break-even and margin of safety standpoint. Rhiannon is debating whether to continue working out of a makeshift office/store in her basement as opposed to a store in the city. Her home expenses total $1,000 a month and she estimates her basement takes 40% of the home's available space. A store would cost $2,000 per month, but grow sales by 75% (80% of the sales would now be in person). If she decides to go in this direction, Rhiannon plans to hire a part-time helper who would produce 1,000 rings per year. Rhiannon estimates that this worker would work 250 hours a year at a rate of $16 per hour. Rhiannon is wondering about the costbenefit analysis of going in this direction. She is also wondering how she might evaluate the helper's performance once she has actual sales and expense numbers. Also, she wants some insight on the best ways to discuss performance with employees.

Rhiannon is wondering if she should also pay the helper a sales commission of $1 per ring sold. This would allow Rhiannon to focus more on production. In addition to producing 1,500 rings a year by herself, Rhiannon is wondering if she can gather and prepare stones for cheaper. Assuming 100 stones per month, she estimates the added fuel expense for this approach would total $150 per month (Rhiannon isn't sure if other vehicle costs like insurance should be included). Materials to prepare the stones for mounting would total $100 a month. Rhiannon is wondering if she should consider other factors like time spent- she expects to spend 6 hours a month gathering, cleaning, and coating stones. She is wondering about potential pros and cons of producing her own stones, outside of projected cash flows. Rhiannon has been offered the chance to buy a 50% share in the stone preparing business she buys from for $300,000. Rhiannon has inquired about borrowing the sum from the bank and has been quoted a 6% annual rate.

She expects the business to maintain its $100,000 annual profit level for the next ten years. Rhiannon also wants to repay the loan within ten years, so she feels like this is an appropriate investment evaluation horizon. She is wondering what some appropriate methods of evaluating this investment opportunity might be. In addition to learning about how you would evaluate the investment and why, she wants to know about other relevant factors which should be considered.

Problem 1: Analyze Rhiannon's business and advise her on the matters raised in the case. Make sure your recommendations are well supported by quantitative and qualitative analysis which ties to the case facts.