This document provides a business proposal and cost analysis for Premium Plaques, a company that manufactures and engraves plaques using sustainable materials. It summarizes Premium Plaques' costs, including direct materials, direct labor, manufacturing overhead, and SG&A costs. It analyzes two key business decisions - whether to open on Sundays and the intensity of marketing - using a cost-volume-profit analysis. It determines that opening on Sundays and pursuing minimal marketing will be the most financially rewarding options. The document also provides a budget and discusses how variances will be considered to compare actual performance to planned expectations.

1. Premium Plaques Business Proposal
ACC 312H
April 24, 2018
Kaylen Combs, Daniel Madden,
David McCarty & Veshal Arul Prakash

2. INTRODUCTION
Premium Plaques honors the accomplishments of individuals and teams through the
manufacturing and updating of plaques. By creating sustainably-sourced plaques from reclaimed
wood, Premium Plaques provides a customization opportunity for customers, ensuring that they
receive the perfect plaque for their needs. Because these plaques are created with sustainable
materials and minimal waste, they are especially appealing to the local eco-friendly culture. With
the updating service, Premium Plaques will encourage customers to return as they need to update
their plaques over time. This two pronged approach allows Premium Plaques to offer both a
product (plaques) and a service (updating) to its customers.
Making and engraving plaques is not a novel idea; however, there is an opportunity to enter the
market by focusing on The University of Texas at Austin. Bat City Awards and Apparel is the
only plaque business within walking distance of campus. Additionally, Bat City is only open
from 9:00 a.m. - 5:30 p.m., Monday through Friday. College students are unlikely to have cars,
busy during the week, and typically unwilling to venture far from campus on foot. Having a
location closer to campus that better accommodates the schedules of students with more flexible
hours and quick turnaround time will differentiate Premium Plaques from the competition.
A convenient location will make it easy to build relationships with students, organizations, and
administration at The University of Texas at Austin. This area is not only home to hundreds of
student organizations who recognize outstanding members each semester, but home to many
buildings who honor donors throughout their halls. These local relationships would encourage
re-orders, resulting in a constant stream of demand.
The remainder of this proposal will describe the startup costs, key decisions, budgets,
profitability and risk, and performance evaluation metrics necessary to get Premium Plaques off
the ground and into the hands of UT students and staff.
COST ANALYSIS
As a manufacturer who sells its goods directly to consumers, the key costs that Premium Plaques
must consider are direct materials, direct labor, manufacturing overhead, and SG&A costs.
Direct materials, direct labor, and manufacturing overhead all feed into cost of goods sold (after
considering balances for works in progress and finished goods). Each of these costs is analyzed
in more depth below, followed by a discussion about costing methods and the applicability of
activity based costing.
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3. Direct Materials
The direct material costs are variable with units produced and directly traceable to the specific
product that the materials are used to create. Cost estimates are based on researched prices for
the materials we would use, such as wood, metal, tape, etc. The quantity of inputs needed to
produce one plaque are based on surface area rates and use a baseline of a 1 ft. x 1 ft. wooden
plaque. Plaques require wood, metal, tape, wood stain, and a lacquer, whereas new engravings
only require the metal and tape. The rates and estimated prices are included in the ‘Cost
Assumptions’ tab of the attached master budget excel sheet.
Direct Labor
Since manufacturing employees are paid hourly and only work on one type of product at a time,
direct labor costs are variable with units produced and directly traceable to the product line.
Plaques take longer than engravings as the wood has to be cut and stained before any engravings
can be applied. Thus, each plaque requires five hours of labor while an engraving requires 1
hour. The manufacturing employees are paid $10/hour, as it is not a job that requires an
incredibly well-trained workforce that could deserve a higher wage.
Manufacturing Overhead
The manufacturing overhead cost was harder to predict, as it is difficult to estimate the additional
costs associated with the production of plaques and engravings. The components of
manufacturing overhead would be workshop rent, equipment maintenance, machine
depreciation, and variable overhead. Workshop rent was calculated as half of the overall store
rent, as the store will be used as both a workshop and a retail space. Maintenance was estimated
as $20 per month to ensure that there was sufficient funding available in case of equipment
breakdowns. All equipment was depreciated using a straight-line method with a $0 salvage value
and a useful life of 10 years. These previously mentioned costs all are fixed costs and are not
traceable to a single product. Additional variable manufacturing overhead was allocated at a rate
of $0.75 per labor hour and is traceable to the product line that the labor hours were for. Labor
hours were chosen for the cost driver as it is the best indication of the intensity of resources
dedicated to the production of a certain product and thus best represents any additional costs
(such as electricity) that would correspond with that production.
Cost of Goods Sold
For the COGS calculation, ending finished goods balances were all set to $0 as plaques are made
upon order by a customer and thus there is no constant inventory. This allows for products that
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4. align with a certain customer’s specifications. Works-in-progress balances were equal to the
balance in the direct materials account at the end of each period, which was set to be 20% of the
materials needed for the next period’s production. Thus, COGS equals the sum of direct labor,
direct materials, and manufacturing overhead, minus the ending balance of materials inventory.
SG&A Costs
The SG&A costs for Premium Plaques include variable selling expenses for materials (packaging
envelopes, receipt paper, bags, etc.) which can be traced to either plaques or engravings.
Additional SG&A costs that are fixed and not traceable will be the remaining building rent
reserved for the retail storefront, wages of the sales staff, advertising costs (including
depreciation of signage), and depreciation of office supplies and furniture. Signs and supplies in
this section were depreciated using the same straight-line method with a ten year useful life and
$0 salvage value.
Costing Methods
Activity based costing is not an appropriate measure for Premium Plaques. ABC is best used for
companies who have substantial indirect costs that are difficult to assign to a process or product
line. However, the simplicity of costs, many of which are variable and directly traceable, for
Premium Plaques makes ABC unnecessary. Since ABC is not the method to be used, cost
hierarchy is not a relevant classification.
Variable costs make up a large proportion of the total costs for Premium Plaques. This makes it
easier to breakeven due to the low fixed costs, but also makes it more difficult to have incredibly
high profits as any increases in revenue are met with corresponding increases in costs. In other
words, the cost structure of Premium Plaques reduces the downside risk of losing money but also
eliminates the upside risk of earning incredibly high profits.
KEY BUSINESS DECISIONS
Using a Cost-Volume-Profit analysis, we evaluated two key business decisions:
1) Days of Operation - Closed or opened business hours on Sunday’s
2) Intensity of Marketing - Intense marketing or minimal marketing
For the CVP analysis, we made annual projections on the number of units sold, sales price,
revenue, variable costs (wood, metal sheets, tape rolls, envelopes, wood stain bottles, wood
lacquer bottles, labor wage of manufacturing employees), contribution margin, fixed costs
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5. (annual rent, advertising, engraver, table saw, computer, printer, office furniture, supplies, labor
wage of sales employees), and profits (before and after taxes).
The projection on the number of units sold was adjusted based on conservative assumptions,
while all other inputs were based on realistic comps. The break-even quantity, break-even
revenue, margin of safety, and operating leverage were calculated based on the inputs and
outputs in the contribution margin statements.
CVP Analysis Comparison
Figure 1: CVP Analysis Table
Options
Revenue
Variable Costs
Contribution Margin
Fixed Costs
Profits Before Taxes
Profits After Taxes
Breakeven Plaques
Breakeven Engravings
Breakeven Revenue
Margin of Safety
Operating Leverage
Days of Operation
Closed Sunday Opened Sunday
$116,380.00 $129,300.00
$78,710.66 $87,449.47
$37,669.34 $41,850.53
$35,579.92 36,803.92
$2,089.42 $5,046.61
$1,671.54 $4,037.29
850.07924 879.4134641
1883.397783 1947.900823
$109,924.69 $113,708.16
5.55% 12.06%
31.13% 29.62%
Intensity of Marketing
Minimal Intense
$129,300.00 $160,500.00
$87,449.47 $109,029.63
$41,850.53 $51,470.37
36,803.92 $48,799.92
$5,046.61 $2,670.45
$4,037.29 $2,136.36
879.4134641 1232.551753
1947.900823 2370.291833
$113,708.16 $152,172.74
12.06% 5.19%
29.62% 30.92%
A CVP analysis (see Figure 1) was used to analyze the key business decision regarding the days
of operation - specifically, whether Premium Plaques should be closed on Sunday or opened on
Sunday from 11 AM - 2 PM. If the store is opened on Sunday, we made an assumption that
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6. 11.11% more new plaques and 11.08% more engravings would be sold, so the revenue would
increase by $12,920.00. As a result, although the variable costs were higher by $12,199.49, the
contribution margin was greater by $4,181.19. Similarly, even though the fixed costs were higher
by $1,224.00, the profits before taxes ended up $2,957.19 more. Assuming a 20% corporate tax
rate based on the recent corporate tax policy changes, the profits after taxes would be $2,365.75
greater when the store is kept open on Sunday’s.
While the profits after taxes are more favorable towards keeping the store open on Sunday’s, the
break-even number of plaques and engravings, as well as the break-even revenue, are not as
favorable. In fact, keeping the store open on Sunday’s requires a break-even revenue that is
$3,783.47 higher. However, the margin of safety is 6.51% more favorable, and the operating
leverage is 1.51% less risky with the store kept open on Sunday’s.
In order to compare the key business decision regarding the varying intensity levels of the
marketing strategy and operations, a CVP analysis was again used. Minimal marketing mainly
includes banners and poster boards, whereas intense marketing includes online ads in addition to
banners and boards. With intense marketing, we assumed that 30% more plaques and 12.87%
more engravings would be sold to customers, so the revenue would be $31,200.00 greater than
that of the minimal marketing. Variable costs, though, is also $21,580.16 higher with intense
marketing, leaving a contribution margin that is $9,619.84 greater. Intense marketing is a solid
option in the short-term, but the $11,996.00 greater fixed costs leaves a $2,376.16 lower profit
before taxes and a $1,900.92 lower profit after taxes.
The break-even number of plaques and engravings are significantly more favorable with minimal
marketing. As a result, the break-even revenue is 33.82% more favorable for minimal marketing.
Similarly, the margin of safety and operating leverage are 6.87% and 1.3% more favorable and
less risky, respectively, with minimal marketing.
Relevant Qualitative Factors
Certain non-financial and qualitative factors must be considered for the days of operation key
business decision. Client-focused examples include the interest level of the target market to place
new plaque and update orders on Sunday, the routine Sunday schedules of clients, and the
transportation capacity of the customers.
On the other hand, internal operations related examples include the interest level of
manufacturing and sales employees to work on Sundays, prior commitments of the employees,
incentivizing the employees to not take Sunday off, and the availability of raw materials on
Sunday when sourcing locations may be closed.
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7. Similarly, non-financial and qualitative factors should be considered in regards to the intensity
level of marketing. Cyclical patterns in plaque sales must be observed in order to effectively
execute marketing. Factors such as the marketing data analytics for online and TV ads, the
customization of the online ads to particular clients, the design of online ads and TV
commercials, as well as the structure and size of the banner and poster should be further
considered. These qualitative factors could play an important role in the managing the interest
level of the customers and the effective management of resources related to expensive marketing.
Final Business Decision
Due to the variable and fixed costs involved in both of these key business decisions, a CVP
analysis was necessary to accurately evaluate all of the options and identify a winner for each of
the key decisions. In regards to the days of operation decision, keeping the store opened on
Sunday’s from 11 AM - 2 PM seemed to be the better option. For the intensity levels of
marketing decision, a minimal marketing strategy rather than an intensive marketing strategy
would be more rewarding to the store. With both of these in mind, the most financially rewarding
option would be to combine the winning option of both key business decisions, so that the plaque
store remains open on Sunday’s while carrying out a minimal marketing strategy.
Choosing the best option for both of the key business decisions boiled down to three main
factors: the profits after taxes, the margin of safety, and the operating leverage. With the days of
operation decision, keeping the store opened on Sunday’s results in 2.4 times the profits after
taxes as that of closing the store on Sunday’s. The 6.51% higher margin of safety suggests that
there is a greater cushion before incurring losses, and the 1.51% lower operating leverage
promotes the idea that there is a lower business risk with this option.
In terms of the intensity of marketing decision, the minimal marketing strategy yields 1.89 times
the profits after taxes as that of the intensive marketing strategy. Similarly, the 6.87% higher
margin of safety and the 1.3% lower operating leverage with the minimal marketing choice
backs the idea that the business would face slightly lower risk and have more cushion to operate
with.
Thus, keeping the store open on Sunday’s and a minimal marketing strategy should grant a
greater yield for the plaque store.
BUDGET AND VARIANCE ANALYSES
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8. After estimating costs and making key strategy decisions, a budget can be prepared to plan
Premium Plaque’s operations for the year and predict success. Since this budget will not be a
completely accurate forecast of the year’s events, variances need to be considered so that the
firm’s true performance in certain areas can be compared to what was expected and planned for.
Budget
The attached “Premium Plaques Master Budget” spreadsheet outlines ownerships plan and
expectations for performance and operations for this year. While the costs are in line with the
assumptions and key decisions discussed in earlier sections, Premium Plaques still needed to
estimate the demand for its products. The University of Texas is a large institution, with over
50,000 students and 3,000 faculty. Assuming the university wants to recognize the top 1% of
students and faculty for their contributions and achievements, this creates a yearly demand for
530 awards. Additionally, there are over 1,300 registered student organizations on campus.
Conservatively estimating that only half of these organizations give out some type of award
(such as to an alum, professor, or student leader), this yields another 650 awards. Factoring in the
500,000 alumni, if the university recognized just .5% of them each year this would require 2500
awards. This is a (rather conservative) estimate of 3680 plaques per year in the University of
Texas market each year. Premium Plaques recognized that 100% market share was unreasonable,
especially in the first year, but believed that its convenient location would appeal to students and
administration with tight schedules and help it capture around 25-30% of the UT plaque market.
This came out to around 1000 plaques per year. Additionally, each plaque requires multiple
engravings to reflect the awardee (or awardees), the recognizing body, and the accomplishment
that warranted the award. Thus, Premium Plaques could conservatively expect to perform just
over 2000 engravings per year. However, demand would not be uniform throughout the year.
While alumni and some faculty might be recognized sporadically, most awards at The University
of Texas are handed out near the end of the Fall and Spring semesters. Thus, Premium Plaques
could expect a spike in demand at these times. The assumptions from this paragraph led to the
creation of the following revenue budget shown in in Figure 2.
Figure 2: Revenue Budget
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9. The prices were estimated based on what competitors were charging for similar products. For
example, Bat City charges $76 for plaques and Accent Trophies charges $95. North Star
Trophies charges $5 per logo and $0.15 per letter on engravings. After evaluating the
competitive price landscape, Premium Plaques set fixed prices of $85.00 per plaque and $20.00
per engraving. This is not the lowest price available to consumers, but Premium Plaques focuses
on a strategy of product differentiation and convenient location so it is not imperative to compete
solely on price. Combining these revenue figures and the costs previously mentioned, Premium
Plaques is able to achieve the results shown in the following income statement (Figure 3) and
Balance Sheet (Figure 4) through its first fiscal year.
Figure 3: Budgeted Income Statement
Figure 4: Annual Balance Sheet
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10. While the bottom line on the income statement ($4037.29) is not the most promising, it is
alwaysdifficult for a business to turn a profit in its first year so it is relieving to see any positive
number. Also, ownership believes that Premium Plaques is in a position to quickly grow to
capture additional market share and increase profits in the near future. Additionally, as shown by
the zero balance for note payable in Figure 4, Premium Plaques was able to fully pay off the loan
from the bank in the first year. This puts them in a safer position moving forward as they will not
have to worry about paying off debt or interest.
Variance Analyses
In order to observe the performance of the different employees and operations within Premium
Plaques as compared to what was budgeted, ownership should look at variances for sales mix,
direct labor input quantity, and direct material quantity. The importance of each of these
measures for Premium Plaques is discussed in the next paragraphs.
Sales Mix Variance
While Premium Plaques offers two different product lines (new plaques and plaque engravings),
the two are not wholly unrelated. Ideally customers who purchase new plaques will return in the
future to have them engraved with updated information. In this sense, Premium Plaques is
operating with a modified razor-and-blade model. If sales mix variance changes as a result of
fewer people having their plaques engraved, it may be a sign that Premium Plaques is not doing a
good job retaining customers and keeping revenue streams open and may have to lower
engraving costs or institute rewards systems to bolster customer return rates.
Direct Labor Input Quantity Variance
Because Premium Plaques pays it’s manufacturing employees by the hour, it must carefully
watch to make sure that workers are not watching the clock and performing tasks slowly so as to
maximize their paychecks. If staff members are inefficient and unable (or unwilling) to stay
within the constraints of five hours per new plaque or 1 hour per engraving, then Premium
Plaques must consider increasing training for employees, hiring new workers who are more
capable, or switching the compensation structure to a salary-based one that no longer relies on
efficient production in order to keep labor costs low.
Direct Material Input Quantity Variance
As with all manufacturing companies, Premium Plaques must ensure that it is keeping material
waste at a minimum in order to minimize costs. If higher quantities of materials are required to
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11. produce the same number of products, ownership must intervene before profits are substantially
impacted. If necessary, Premium Plaques could pay bonuses to its manufacturing employees if
input quantity variance is below a certain threshold to ensure that all members of the company
are equally incentivized to reduce these unnecessary material expenses.
FIRM PROFITABILITY AND RISK
After preparing the budgeted income statement, we can use various analytical models to help
determine the profitability and risk factors of Premium Plaques. To determine these factors, the
firm used the segmented contribution margin to determine the profitability of its two business
lines. Based on this the company then determined its weighted average contribution margin,
break-even point, margin of safety, and operating leverage. This accomplished, Premium Plaques
then ran a 5-year NPV calculation and determined an IRR to determine the long-run profitability.
Segmented Contribution Margin
To understand the profitability of Premium Plaques a segmented contribution margin is
necessary as it breaks down the variable costs by product, allowing for a closer inspection. In the
attached workbook titled ‘Risk and Profitability’ the analysis reveals that the plaques have a
higher unit contribution than the engravings ($24.72 and $7.73 respectively). While the plaque
unit cm is excellent, an employee must work five hours to make that profit ($4.95/hour) whereas
the engraving profit of $7.73 can be earned in one hour. This considered, the firm must remain
diligent in finding customers who need plaques updated and retaining the ones that they make
plaques for. If the firm found itself losing market share among plaque companies, lowering the
engraving price should be the first change made.
Safety Metrics
The company’s pretax profit of $5,046.61 is only 3.9% of the yearly revenues of $129,300 which
would indicate the the firm cannot afford to lose business. This intuition is confirmed by the
breakeven point and margin of safety calculations. Using the sales mix breakdown the analysis
reveals that the firm must sell 879 Plaques and update 1948 engravings to breakeven. This leaves
the firm with a low Margin of Safety of 12% and therefore little room for error.
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12. Figure 5: Safety Metrics
Given the high breakeven revenue and the low margin of safety, it is encouraging to see that the
firm has low operating leverage. Low operating leverage means that most of the firm’s costs are
made up of variable costs rather than fixed costs. If the company can negotiate lower costs for its
variable inputs or use the inputs more efficiently, the profits and therefore Margin of Safety will
increase dramatically.
Net Present Value and Internal Rate of Return
Figure 6: NPV and IRR
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13. For the net present value calculation the firm projected its revenues five years out using the
compound annual growth rate for the Building Retail industry of 6.93%. For COGS and SG&A
the projections are based on the proportion of year one values to sales revenue (75% and 19%
respectively). The depreciation remained constant as the assets depreciated had 10 year useful
lives and were discounted using the straight line depreciation method. The firm had no capital
expenditures as the machinery necessary to make the plaques was apart of the initial outlay. The
discount rate used was the Weighted Average Cost of Capital and was calculated using the
WACC inputs provided by Aswath Damodaran in his dataset found online at ​www.stern.nyu.edu.
The firm’s five-year outlook is positive as the PV of Year 5 cash flows was 52% higher than
Year 1 cash flows. The company needs the IRR to be greater than the discount rate of 6.21%
used in order for the project to be profitable. An IRR of 48% greatly surpasses that rate and
indicates Premium Plaques’ long term viability.
The high breakeven revenue and low margin of safety show that the firm is susceptible to risk
early in its life. However the NPV model and IRR indicate that if the firm can survive in its
infancy, it has the potential to grow rapidly in large part due to its low operating leverage.
FIRM PERFORMANCE EVALUATION
Premium Plaques’ strategy is built around product differentiation. The critical success factors
(CSFs) include convenience, environmental consciousness, and local knowledge. These key
differentiators provide the basis of Premium Plaques’ strategy and evaluation.
Balanced Scorecard
A balanced scorecard is utilized in order to ensure that Premium Plaques is successfully
implementing all of their CSFs. Each objective is related to a different CSF, thus ensuring that
performance measurements reflect a holistic view of the company’s strengths and opportunities.
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14. Figure 7: Balanced Scorecard
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15. EMPLOYEE PERFORMANCE EVALUATION
Roles and Duties
There are two types of employees at Premium Plaques - sales employees and manufacturing
employees - and their main roles and duties are different. The manufacturing employees are
responsible for the actual construction of the new plaques and engravings on existing plaques. In
order to be successful in this role, the manufacturing employees should have prior experience
with constructing plaques or similar products, so they must be extremely skilled in this specialty
service. The sales employees are responsible for assisting the needs of the customers and taking
care of sales in the check-out area. Thus, the sales employees need strong soft skills and
knowledge about plaque customizations.
Decision Rights
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16. Regarding decision rights of employees, Premium Plaques will apply a decentralized decision
making framework. This is because there is only one location - near the UT Austin campus - for
the company, and there is a small employee workforce, in which there are only two types of
employees. Therefore, the overall structure of the firm should be relatively flat, as an extensive
top-down management structure for such a small employee base would be ineffective.
With a decentralized employee decision rights platform, the employees can make better use of
local info to make strategic decisions, respond quickly to the customers and the overall
environment, feel empowered and accountable, and train themselves to become future managers.
This system would drastically reduce bureaucratic bottlenecks and spur innovation at the
company.
Some of the weaknesses of decentralized employee decision rights include the emphasis on local
goals at the expense of the firm’s goals, inconsistent implementation of the firm’s policies, and
competition among local managers. However, several of these risks associated with a
decentralized decision making model is mitigated by the fact that a lean employee base operates
in only one location.
Performance Measures
The Premium Plaques store location near the UT Austin campus is a profit center. The main
objective of a profit center is to maximize profit. Profit can be maximized in two ways:
maximize revenues and/or minimize costs. Factors and metrics that are part of the
responsibilities to achieve this central objective include input and output mix, pricing,
distribution. For example, product lines and regional operations significantly impact the
mentioned factors and metrics. In this case, Premium Plaques customizes all plaques, so the
company does not have specifically-outlined product lines, but the two main types of products
sold are new plaques and engravings on existing plaques. Also, the local operations simplifies
the distribution process and impacts the input/output mix.
At profit centers, in general, sales and cost variances, profit, customer satisfaction, and market
share are appropriate factors and metrics to consider for performance measures. For Premium
Plaques specifically, customer satisfaction and profit should be the key factors measured.
Customer satisfaction levels could be measured by requesting customers to fill out a quick
survey at the end of their transactions. The employee’s compensation scheme will be based on an
hourly wage. In order to continue serving clients of Premium Plaques, employees must meet a
certain minimum benchmark from their customer survey scores. Thus, the compensation will be
fairly consistent. However, employees can be incentivized to reach a more challenging
benchmark if a gift prize is awarded monthly to those that meet that challenging benchmark. This
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17. compensation scheme of a flat hourly wage and the possibility of a monthly gift prize is a
cost-efficient method to ensure expectations are met while incentivizing employees to set higher
goals.
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