1. Evaluate the projected income statement for Hollydazzle presented in Exhibit 2. Is this income statement appropriate for projecting profitability? Why or why not?

The issue with this income statement is that Site Maintenance is not calculated in the Cost of Goods Sold. This cost is Hollydazzle’s equivalent of their ‘store rent.’ Adding this lowers their Gross Profit estimates.

In addition, when making the decision to go into business, they need to also consider the Opportunity Costs involved. Their Opportunity Costs are $375,000 plus the value of the benefits they would also earn. These would not be seen on their Income Statement, but they are relevant as a part of their decision process.

2.

a. Forecast Hollydazzle’s operating income for the year ended June 30, 2000 if sales grow by 50% over forecasted sales for the June 30, 1999 year. Assume that Hollydazzle’s cost structure and relationships remain the same as in 1998, and as before, 1,200 new customers make purchases each month.

At a 50% growth, Hollydazzle’s operating income would be a $113,824.00 loss at the end of 2000.

b. Do you agree with John’s analysis that increased volume will improve Hollydazzle’s profitability? Provide some analysis to support your answer.

Yes, Jon is correct that increased volume will improve Hollydazzle’s profitability. However, it is important to recognize that at maximum capacity (300,000), their operating income is only $57,176.00. (This, divided by the three partners, is only $19,060 as opposed to the $125,000 plus benefits that they could be making otherwise.

3. Holldazzle can also consider outsourcing its warehousing and distribution functions. It would have to pay MooV, a warehousing and distribution specialist who has worked with other E-tailers, 6% of total sales. Should Hollydazzle consider outsourcing its warehouse operations? At what level of sales would it be indifferent between insourcing and outsourcing? What other factors should Kristin, Eric and John consider in making a decision?

Hollydazzle should consider outsourcing at their present level of estimated sales. Their savings would be $3,360. This depends on a variety of things, though. This is dependant on MooV providing a yearly contract only because, at the estimated growth rate, Hollydazzle would be better off not outsourcing once their number of transactions reached greater than 54,054. It also depends on the value of experience in the warehousing and distribution field will assist the team as they move forward with the business.

4. John and Eric are keen to generate additional revenues for their business by getting e-tailers of complementary products to advertise on Hollydazzle’s website. Kristin immediately set about allocating costs in order to analyze the relative profitability of the merchandising and advertising parts of Holydazzle’s business. Which costs, if any, do you suggest she should try to allocate, and why? (Note: This is more of a conceptual question about whether/why Kristin should go to the trouble to allocate shared or common costs to the different lines of business). Why should she, or shouldn’t she?

She should definitely go through the trouble to allocate the shared / common costs by complementary products. These numbers will be very useful as the business moves forward to analyze the success and/or failure of certain products. If these products struggle, then Hollydazzle will be able to make an educated decision about the profitability of dropping a product line.

5. For the year ended June 30, 1999, Hollydazzle’s actual performance was as follows: It had 50,000 transactions and revenues of $450,000. Actual average merchandise costs per transaction were $8.75. Based on this information, what was the company’s actual gross margin? What factors explain the difference between actual and budgeted gross margin (be as specific as possible)? Based on this analysis, what actions should manager’s take to get their actual profit “on track” with expectations?

The company’s actual gross margin was -$53,500, or a unit cost of $-1.07. The reason for this was because their differential between unit sales and unit merchandise cost (variable) is only $ 0.25. Therefore, in order to overcome the $66,000 cost of goods sold, they would need 264,000 transactions. The managers should increase their prices, reduce their fixed costs, reduce their variable costs, or remove the lower-margin products that are bringing their average unit revenue down.

6. Do you think that Kristin, Eric and John should move forward with this business venture? If so, what three key performance indicators should they focus on to ensure their company’s future success? If not, what lessons can we learn from their experience trying to launch an internet based business?

I do not think that they should move forward with the business. The opportunity cost is too high and they will never recover these costs without changes to their business structure. **need lessons learned**