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Accounting 311 Case Study: Final Report Don’t Burn Man Sunshine Hendricks owns a business called Don’t Burn Man. Sunshine sets up shop for two weeks at the Burning Man festival outside of Gerlach, Nevada every year. This is the only business Don’t Burn Man conducts during the year. Don’t Burn Man sells three products: Bags of Ice, Popsicles, and Sunscreen. The selling price for Ice is $5/bag. Popsicles sell for $3/each. Sunscreen sells for $15/bottle. Don’t Burn Man buys bags of ice for $1.05 each. They buy popsicles in a pack of 100 for $38 and sunscreen in packs of 10 for $44. Don’t Burn Man’s other costs include:: · Credit card fees are 4% of the sales transaction. Don’t Burn Man only accepts credit cards and does not accept cash for security reasons (the playa is a tough place). · Don’t Burn Man hires one employee for the event and pays her $1,500 for the two weeks, plus a space in the tent. · Don’t Burn Man must get a permit to sell at Burning Man. The fee for the permit is $500. · Don’t Burn Man must pay for gasoline to and from the event and to power the generator for the freezer. Gas generally costs $600 for the two week period. Don’t Burn Man has two fixed assets that they use at Burning Man every year. These assets are only used during the two week festival and not used for any other revenue generating activities throughout the year. They own a truck with a built in freezer that they purchased in 2019 for $20,000. They estimate they’ll be able to use the truck for 6 years and will be able to sell it for $2,000 when they’re done with it. They also have a generator, which was purchased for $2,000 in 2020. They expect the generator will last for 5 years and will be worthless at the end of 5 years. Don’t Burn Man would like you, their accountant, to help them analyze their business. In Module 12, you analyzed costs, break even and target income. In this module, you’ll use that analysis to help with some business decisions. Don’t Burn Man has one freezer that must be shared by both ice and popsicles. The freezer has a capacity of 48,000 square inches. One bag of ice takes up 8 square inches. One popsicle takes up ⅕ square inch. They estimate that if they had enough space, they could sell 10,000 bags of ice and 3,000 popsicles. Decision #1: Don’t Burn Man would like to maximize their profits. As they plan for next year, how many bags of ice and how many popsicles would you recommend that they stock in the freezer? Don’t Burn Man is thinking of expanding. Sunshine’s grandmother has offered Sunshine a loan for the business. Grandma is not charging interest and has asked that Sunshine pay back the loan “when she can” (i.e. you do not need to include loan repayments in your net income and cash flow analyses). Don’t Burn Man would like to earn a minimum return of 10% on their additional investment. Don’t Burn Man is considering two options: an additional freezer or a wifi hotspot. Investment Option #1: Freezer The first option is an additional freezer that would allow Don’t Burn Man to stock enough ice and popsicles to meet market demand. The freezer comes with its own trailer and costs $53,000. Don’t Burn Man estimates the freezer could be used in operations for 10 years and could be sold for $3,000 after that time. The freezer could operate off of the existing generator, but would require an additional $200 of gasoline. Sunshine believes that she and the one employee could manage the increase in business without the need to hire additional help. Investment Option #2: Wifi Hotspot The second option is a wifi hotspot tower. The playa that hosts Burning Man does not have cell service, leaving Burning Man attendees with no ability to post to social media. This investment option would allow Don’t Burn Man to sell wifi access. Don’t Burn Man expects they can charge a flat rate of $29.95 for the two week period and that market demand will be 20,000 users. The Wifi Hotspot comes with its own trailer and generator and costs $530,000. It is estimated that the Wifi Hotspot can be used in operations for 3 years before the technology becomes obsolete. At that time, the hotspot will be worthless. Because the generator is integrated with the hotspot, it will be worthless as well. Don’t Burn Man estimates that will need to buy an additional $1,000 of gasoline to run the hotspot generator. They will also need to hire a qualified IT employee to run the hotspot and fix any issues. They have found the perfect candidate who is willing to join the Don’t Burn Man team for $10,000 for the two weeks. They will also need to purchase a two week satellite subscription to provide internet access to the hotspot for $50,000. Decision #2 Assuming Don’t Burn Man can only choose one investment opportunity, should they choose the additional freezer or the wifi hotspot. Assignment: Prepare a report for your client, Don’t Burn Man. The main body of the report should detail your recommendations and a brief explanation of why you are making these recommendations. Recommendations include: · The amount of each product Don’t Burn Man should plan to sell to attain a target income of $40,000 · The optimal number of bags of ice and popsicles to stock if only one freezer is available · Which of the two investment options to choose. All calculations should be included in an appendix at the back of the report.