Reference no: EM132885078

Question - Upon graduation from the university, Chloe launched an online woodworking business called Denman Designs. In Chloe's last year of her business program, there was a mandatory course called Small Business Management. One of the requirements in this course was a group assignment to build a business plan on any start-up venture. It was at this time that she convinced the other two group members, Agron and Giovanni, to build a business plan for an online woodwork business. Agron, an accounting major, and Giovanni, a marketing major, later became business partners when Denman Designs was launched.

The three knew upfront that there wasn't anything unique about an online woodworking business and that their business could easily be any other online artisan shop. The unique features they incorporated into the business plan and brought forward into the launch were as follows:

1. The products would be designed by women for women. Women could submit their designs online according to a template design chart available on the Denman Designs website.

2. The original designer would receive $10 for every piece sold online from Denman Designs

3. Denman Designs would donate 10% of the selling price to charities providing services to women in need in less-developed countries.

4. The woodwork manufacturing will be done by qualified artisans and not mass-produced abroad. On average. Denman Designs will be charged $50 per piece by the qualified craftsperson.

5. For a personal touch, shipping would be from the artisan directly to the client. This would come at a $10 cost to Denman Designs.

The business was run out of Chloe's 900 square foot condo, of which 90 square feet was a allocated to the business. Ten percent of the condo's annual carrying cost was expensed through Denman Designs. The 10% of property tax, insurance, utilities, mortgage interest, and condo fees amounted to $1,700 per year. The company also hired a web designer at a cost of $200 a month, the company's tax return was prepared by a public accountant for $1,000 a year and there was a $500 of amortization of laptop and printers.

The three partners were feeling a bit discouraged after their first year of operations. With an average selling price of $109 per piece, they just reached the break-even point. They realized that break-even represented only 20% capacity. None of the partners drew a salary from the company and therefore they still had to work at entry-level management positions. On top of that, each partner was devoting about 10 hours a week to the business.

Just as they were about to give up, a company from Sweden contacted them and offered to purchase $400 pieces at $89 each. The pieces would be sold only in Sweden. If the order was accepted, the $10 fee for normal shipping would not apply and they would incur only a lump-sum shipping cost of $800 to Sweden. The three partners met for coffee the following night to discuss the offer. Two of the partners were not excited about the offer given that they had just reached breakeven and now were expected to give a large price discount on this volume purchase. They didn't know what to do, and turned to you for help.

Required - Prepare a report to the partners advising them whether to take on the order from Sweden. Before you tackle the question of what they should do, ask yourself what does 20% capacity represent in units and how much profit is to be made on the special order? Give thought to both quantitative and qualitative information, such as the fact that no salary has been drawn to date.