Tom Gonzalez, founder of Safety-Plus, expects to spend the next one-half year developing and testing prototypes for a safety
light to be worn by runners. Tom anticipates paying monthly rent of $1500 for space in a local warehouse where the safety light
will be designed, developed, and tested. Utility expenses for power and heat are estimated at $450 per month. Insurance is
estimated at $220 per month. Tom plans to "draw down" a salary of $2,850 per month. Materials needed to build and test an
initial prototype product are expected to cost $9,500. In addition, each redesign and new prototype will require an additional
$4,900 investment (in other words, the first prototype will cost $9,500 and each additional prototype will cost $4,900). Tom
anticipates that before the final safety light is ready for market at the end of six months, the initial plus two more prototypes will
need to be built and tested. Costs associated with test marketing the safety light are estimated at $13,500.
A.
Determine the amount of financial capital that Tom Gonzalez will need during the six-months it will take to develop and
test market the safety light.
B.
C.
What type of financial capital is needed and what are the likely sources of that capital for Tom?
What would be your estimate of the amount of financial capital needed if the product development period lasted nine
months? (assume that even though it takes longer, only three prototypes will be needed).
D. What compensation arrangements would you recommend as he hires additional members of the management team
(considering that as an early stage company he is not able to pay competitive salaries)?
Let's assume that Tom does indeed develop and successfully market the safety light product. Tom's venture will purchase
materials for making the product from others, assemble the products at the venture's facilities, and hire product sales
representatives to sell the product through local retail and discount stores. The costs of plastic; bolts, washers, and nuts;
reflective material; and a "micro-chip" are expected to be $4.15 per safety light. Assembly costs are projected at $2.25 per unit.
Shipping and delivery costs are estimated at $.35 per unit and Tom will have to pay commissions of $.30 per unit sold by the
sales representatives.
A. What will it cost to produce and sell each safety light?
B. What price will Tom have to charge for a safety light if he wants a "markup" of 60 percent on each sale? Now, what would
the retailers have to ultimately sell a safety light if they, in turn, desired a mark-up before their expenses of 50 percent?
C. Now that products are selling, Tom feels he should be paid a salary of $6,000 per month. Other general and administrative |
expenses will be $5,850 per month (including previously mentioned general and administration expenses). How many units of
safety lights will the venture have to sell to cover all operating and administrative costs during the first year of operations
(breakeven point)?
Show your calculations and answers in an Excel spreadsheet document.
Label your document using the following format.
[chapter number for this assignment] - [first initial] [last name]
So, if your name is Bob Smith, your file would be labeled "CH1-BSmith."
Note: In this type of a problem, calculating an incorrect answer for one question, could result in you getting another question
Make sure you understand the question and pay attention to details. Double check your work.
