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Managerial accounting Uncertain Estimate and Break-even Number

John needs some extra income to make ends meet. He could work overtime in his current job and make an additional $2,000 per year. Alternatively, he could use the overtime hours towards an Internet business. He is considering the wholesaling of baseballs to major-league-baseball teams over the Internet. If he is to do this, he expects to incur a yearly cost of $1200 in legal and office expenses. John knows of places where he can buy a baseball for $10. He has two options for the transportation of the baseballs. He could either use UPS and ship a ball for a cost of $4, or use a private carrier and ship up to 1000 baseballs for $1800. The carrier, however, will charge $1800 even if fewer than 1000 baseballs are shipped. John expects to sell 500 balls at $30 each.

Required:
Which of the following alternatives should John choose? Show calculations.

Compared to the income from his current job and overtime, how much extra income will John make from your choice?

John is fairly confident about the numbers used in his calculations except for the sale of 500 balls. Suppose, he can sell only 400 balls, how will your answer to questions 1 and 2 change?

1. Choice: 2. Extra Income:

What is the minimum number of balls John needs to sell to make the decision to do business (instead of doing overtime) the right choice?

What advice would you give John regarding going into this business venture?

Solution Preview

QUESTION: MANAGERIAL ACCOUNTING UNCERTAIN ESTIMATE AND BREAK-EVEN NUMBER
John needs some extra income to make ends meet. He could work overtime in his current job and make an additional $2,000 per year. Alternatively, he could use the overtime hours towards an Internet business. He is considering the wholesaling of baseballs to major-league-baseball teams over the Internet. If he is to do this, he expects to incur a yearly cost of $1200 in legal and office expenses. John knows of places where he can buy a baseball for $10. He has two options for the transportation of the baseballs. He could either use UPS and ship a ball for a cost of $4, or use a private carrier and ship up to 1000 baseballs for $1800. The carrier, however, will charge $1800 even if fewer than 1000 baseballs are shipped. John expects to sell 500 balls at $30 each.

Required:
Which of the following alternatives should John choose? Show calculations.

Compared to the income from his current job and overtime, how much extra income ...

Solution Summary

The solution examines uncertain estimates and break-even numbers. Alternatives are provided.

$2.19