Breakeven analysis of a retail music store

Résumé du document

Old friends Jane and Elizabeth have decided to open up a retail music store. They will open up a store in a large shopping mall, purchase CDs from the large music distributors, and resell them to the public. Their first decision is to determine if they can profit from this venture, so they must perform a Breakeven Analysis. Their monthly rent and utilities are $5,000. They will hire one part-time employee who will earn $1,000 per month. They also will have a small advertising budget of $300 per month for a website, posters, and ads in music magazines. Other miscellaneous operating expenses will be $100 per month. In addition to their own contributions, they also took out a simple loan for $40,000 at a 12% annual interest rate (1% per month). The CDs cost them an average of $12 each and they will sell them for $20 each. Calculate how many CDs they will need to sell each month in order to breakeven (have a Net Income of zero).

Extraits

[...] The bondholders can not have voting right (unless if they also buy shares). If a company issue bonds instead of shares, it is sure that it will keep the control of its choice, the bondholder will never interfere with the business decision as they do not have the right for that. On the contrary, issue shares means that you will have to share the decision power too. Can not be taken over As the bonds are not shares of the company, you do not distribute part of it. [...]

[...] It means that if they do not reach 225 CDs of sales, they will get loses, but for every CDs sells after this point, they get profit. Another bank has offered them the $40,000 loan at a lower interest rate of 11% per year, but this loan is a discount loan. Is this a better loan for them? Explain why or why not. A discount loan is a loan on which the interests and any others charges are calculated at the time the loan is established. Once they are calculated, they are deducted from the total amount of the discount loan. [...]

[...] If the agencies assign a high rating, that means there's little risk of default, so the issuer can obtain a lower interest rate. So in our case, as the business works extremely good, we can expect a high rating to issue low rate interest bonds The agencies review their ratings on a regular basis to determine if the risk of default has changed over time. If they feel that the level of risk has changed, the agencies may downgrade or upgrade a rating. [...]

[...] Now that we show how they can reach the break even, I will discuss on what it is important for a company to calculate it. When you can forecast with precision your costs and sales; make an analysis of the break even is really simple. I fact, a company reach the break even point when the total of sales or revenues is equal to the total of the expenses. At this point the company makes no profit, but also it makes not losses. [...]

[...] The discount loan is a viable financing option as it has benefits for both parties. We can imagine that this kind of loan is allowed when a company needs cash quickly to pay its suppliers (see in the question The music distributors that sell them their CDs offer terms of 3/10 net 40. Jane thinks that they should not take the discounts since they don't have much extra cash. Elizabeth thinks that they should take the discounts and pay with the company credit card, even though it charges them 22% interest. [...]