Mohammed Bin Abdullah

1830746
Course: ACN202, Section: 2
Semester: Autumn' 20
Submitted to: Naheem Mahtab Sir
Case Study: Ten Alpina Tools
-The Entrepreneur's Dilemma
Table of Contents
Introduction ................................................................................................................................... 3
Change in Business model ............................................................................................................ 4
Break Even Analysis ..................................................................................................................... 6
Extension of the breakeven calculation....................................................................................... 7
Other informational data ............................................................................................................. 8
Recommendation........................................................................................................................... 8
References ...................................................................................................................................... 9
Introduction

Giulia Ferrato is a student of a MBA program and she was employed in a established company
which was specialized in selling mountain climbing equipment.

She was in the organizing and operating sector where she had to organize mountain climbing tours.
During organizing she tried to find good light weight strong pitons as it is a very important
equipment for climbing. Unfortunately, she could not find any and that is when she decided to
make good strong titanium pitons.

Giulia started her startup business taking a trial order of 1000 units of pitons where retailer offered
her $11.00 per unit of pitons but she could not make much profit out of it.

Then she had an offer of 4000 units of pitons from another retailer where they offered her $10.50
per unit of pitons. Later she came to learn that the manufacturing company owner decided to shut
down the business or sell the company. And Giulia showed interested to buy the company which
would cost her $100000.
Change in Business model

1. Giulia is clearly intrigued by the options that have just opened for her. If she were to
accept the customer contract offer and take over the forge, how would her business
model change?

Giulia is a middleman here where she takes order of 1000 unit at $11.00, from the retailer
and she ask forges to manufacture the product. And she needs to purchase titanium alloy
at $1.45 for per unit pitons. At the end she could not make enough profit.

Current Revenue

No. of Units 1000

Sales (11 x 1000) 11000
(-) Expenses
Titanium Alloy bars (1.45 x 1000) 1450
Forging cost 9000
Total Expenses (10450)
Contribution margin (11000-10450) 550

And if she decides to accept the offer of 4000 units at $10.50 and acquire the forge, her revenues
will not change but the cost structure will be different

Cost structure

Units Electricity Cost

Highest Activity 1300 1962
Lowest Activity 1000 1908
Difference 300 54

Variable Cost per unit (300÷54) $0.18

Fixed Cost (1962-234) $1728
Variable Cost (Annual)
Current Proposed
Forging cost $108000 $0
Material cost $17400 $69600
Utility cost $0 $8640
Supplies $0 $5280
Total $125400 $83520

Proposed Variable Costs

Supplies (110/1000) $0.11
Material costs $1.45
Electricity $0.18
Total per unit $1.74

Proposed Fixed Costs

Occupancy cost $33000
Labor cost $345000
Depreciation $14335
Electricity (1728 x 12) $20736
Administrative cost $7200
Total Annually $420291
Break Even Analysis

2. Using Stanley Kowalchecks operating costs as your best guess data about the cost of
operating the forge, perform a simple breakeven analysis for each of the two basic business
model configurations- the current outsourcing arrangement and operating the forge.

Breakeven analysis
Current Proposed
Sales $132000 $504000
Total Variable Cost $125400 $83520
Total Contribution Margin $6600 $420480
Contribution Margin per unit $0.55 $8.76
Breakeven points in units $0 $47978
Breakeven points in sales $0 $503769
 Extension of the breakeven calculation

3. Is the analysis above informative? How can Giulia use or extend the breakeven calculation to
add more information to her understanding of the situation.
Margin of Safety

Current Proposed
Actual Sales (Annual) $132,000 $504,000
Break Even Sales $0 $503,779
Margin of Safety $132,000 $221
Margin of Safety Ratio 100% 0.04%

Operating Leverage
Current proposed

Total Contribution $6,600 $420,480

Margin
Net Operating Income* $6,600 $189
Operating Leverage 1 2224.76

Net Operating Income

Current
Proposal
Sales Revenue (Annual) $132,000 $504,000
Total Variable Cost $125,400 $83,520
Total Contribution Margin $6,600 $420,480
Total Fixed Cost $0 $420,291
Net Operating Income $6,600 $189
Other informational data

4. What other contextual information given in the case is relevant to Giulia’s thinking about
her next move? Why? What other data should she be seeking? Why and how would she use
it?

Giulia should be seeking more information whether the company will be profitable in the long
term which she is acquiring. As there is no information about competing forging companies it will
be hard for Giulia to analyze the market demand. To sustain in the market Giulia should produce
other products apart form pitons. Giulia should find more customers within the 2 years of the
contract. There is a assurance of sustainability of Giulia in the market for 2 years due to the contract
of 2 years but if she cannot gather more customers in between this 2 years then this is will be
challenging for her to sustain furthermore.

Recommendation

5. Based on your analyses, what counsel would you give Giulia?

As only producer of titanium pitons Giulia should stable her position in the market before any
other competitors join the league. She should be thinking of making her product more unique along
with affordable pricing. There is high chance her company might fall she cannot get more
customers apart from the one with 2 years of contract or else it will be challenging for her to hold
the company. She should invest more money and produce new product line to make her position
stable in the market. She should look for other suppliers for raw materials as she need titanium
alloy, major material for her production. She can try getting raw material in less cost from other
companies. This is going to be a great risk of acquiring the company with 100k as she should be
aware of looking after lots hidden expense which she is not used to, like occupancy cost,
administrative cost and many more.
References

Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2016). Managerial accounting. 15th Edition.
Boston: McGraw-Hill/Irwin