Hollydazzle Case Study

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...