Abstract
Luxury Automotive Supply is trying to enter the California market which represents a lucrative market for automobiles owing to its pleasant climate. As the company's luxury automobiles are driven throughout the year due to the climate, the company feel the annual demand for car parts will be similar to that of Florida market.
1) The company's first step is to determine if it can profit from this venture, so it must perform a break-even analysis. The warehouse and office space which the company will rent will cost $12,500 in terms of monthly rent and utilities. It will hire two full-time employees who will earn $1,500 per month and this will cost the company 25% more in health care benefits. In order to market and advertise the new business, the company estimates an annual budget of $4,500 per month for advertisements on television, radio, newspaper as well as a website where orders can be placed. Other miscellaneous operating expenses will be $1,000 per month. The company will finance the move into California by taking $100,000 of equity out of its stock market investment account which earns 18% per year and taking out a small business loan of $50,000 at 12% annual interest rate (1% per month). To build up its inventory, the required auto parts will cost an average of $125 each. In order to realize profits, the company will sell the parts for $215 each. We will calculate how many parts the company needs to sell each month in order to break even, i.e., to reach a net income of zero.
