John’s Gun Shop
John Doe is a recently retired
employee of State Farm. During his career he had a dream of opening up a
specialty gun shop in the Mid-Ohio Valley. Upon retirement John is making that
dream come true.
John makes by hand two types of
rifles that he sells in his gun shop. Making the guns by hand is very time
consuming and John is at a point where he can no longer keep up with the demand
for the rifles. One of the idea’s John has is to invest in a piece of equipment
that would automate part of the process of building the guns.
The equipment would cost $500,000
and have a useful life of 25 years (use straight line depreciation). John would also purchase the annual
maintenance agreement for $1,000 per year.
John did some research and came
up with the following information:
Item
Selling Price Var.
Cost
Ruger No.1 Varminter
K1-V-BBZ $2,000 $500
Marlin 336XLR
$3,000 $500
Currently John is able to build
100 Marlin 336XLR and 200 Ruger No. 1 Varminter K1-BBZ in a years time. With
the purchase of the new equipment John would be able to build 200 Marlin 336XLR
and 400 Ruger No. 1 Varminter K1-BBZ in a years time.
Below are the actual financial
results for the past 3 years and next year’s budget. The budget does not
include the new equipment.
2014 2015 2016 2017 (Budget)
Revenue $560,000 $630,000 $700,000 $770,000
Variable $120,000 $135,000 $150,000 $165,000
Fixed $100,000 $100,000 $100,000 $100,000
Required:
1) What
would be a complete set of “Breakeven Analysis” ? What are the critical points? Explain.
2) In
the analysis of the steps at each point, relate specifically to the gun shop
business.
3) What
does the analysis tell John? As an analyst, what is your recommendation. Be
specific with details.
