Rob Lehnert has approached you, a management consultant, to evaluate the new venture of Caf Xaragua for
Question:
Rob Lehnert has approached you, a management consultant, to evaluate the new venture of Café Xaragua for its projected profitability and cash flow management. In a group of 3-4 people,
prepare a report for Café Xaragua. In your report:
1. Categorize and make a separate list of the start-up costs, and ongoing fixed and variable costs for Café Xaragua. Variable costs would be presented as the per unit cost. Fixed costs
must be presented in the annual amount. Also prepare a list of the sales items and selling prices. (15 marks).
Note: Assume that Lehnert would be paid $35,000 for part-time management for Year 1. In Year 2 full-time manager’s position will replace the part-time positions. Capital assets
can be depreciated over 10 years with zero residual value. When estimating staff costs, check your assumption for the reasonableness test.
2. Prepare budget (annual) contribution margin income statements for Year 1 and Year 2 assuming 250 total daily drinks. Show detailed revenues for individual products and detailed variable and fixed costs information in the statements. (15 marks)
3. Compute the break-even in sales revenue for 2nd year for the company as a whole (including all products). Compute the margin of safety and MOS%. What is the DOL for Year 2? Interpret the numbers that you have computed for BE, MOS, and DOL. (9 marks)
2
4. Other than the compensation for Lehnert as manager, the partners are expecting a before-tax profit of $60,000. Calculate the sales revenue to achieve the target profit in Year 2. Comment on Café Xaragua’s ability to meet the target (3 marks).
Annual | Per Unit | Staff Wage ($16): | |||||||||
Start Up | Fixed Costs | Variable Costs | 126 hrs per week | ||||||||
Open 6am to 11pm to the public and half hour to open store and close the store (equalling 1hr per day) | |||||||||||
Lease improvements | 35,000 | Open 7 days a week | |||||||||
Initial marketing | 12,000 | 20% of wages benefits | |||||||||
Monthly marketing (1000x12) | 12,000 | 2 Staff at all times - first shift 5:30am to 2:30pm - second shift 2:30 pm to11:30pm | |||||||||
Lease (1,571 sq. ft x $45) | 70,695 | 8 hours x $16= 128 and 1 hour (Overtime) x (16+24)= 40 for a total of $168 | |||||||||
Utilities (1571 x 15$) | 23,565 | ||||||||||
Insurance (250 x 12) | 3,000 | ||||||||||
Administrative costs (350x12) | 4,200 | ||||||||||
Staff Wages | $4,032 / week | ||||||||||
Staffe Benefits 20% | $806.40 / week | ||||||||||
Upfront startup costs (legal fees) | 10,000 | ||||||||||
Utilities deposit | 2,000 | ||||||||||
Rental deposit | 6,000 | ||||||||||
1571 square foot | Install roaster | 10,000 | |||||||||
Roaster | 50,000 | ||||||||||
Monthly maintenance roaster | 6,000 | ||||||||||
Scales/scoops | 250 | ||||||||||
Packaging heat sealer | 4,000 | ||||||||||
Telephone system | 2,000 | ||||||||||
Computer system (2x4000) | 8000 | ||||||||||
Espresso machine | 8000 | ||||||||||
Regular coffee machines (4x1000) | 4000 | ||||||||||
Coffee grinders (2x1500) | 3000 | ||||||||||
Stereo systems | 3000 | ||||||||||
Bar/roasting station | 20000 | ||||||||||
Tables (15x1000) | 15000 | ||||||||||
Chairs (60x100) | 6000 | ||||||||||
Couches ( 4x500) | 2000 | ||||||||||
Shelves | 4000 | ||||||||||
Décor | 10000 | ||||||||||
Dishes, cutlery | 5000 | ||||||||||
Total | 75,000 | 240145 | 23565 | ||||||||
136,00 potentail regional customer | |||||||||||
2% of 5.1 million tourist | |||||||||||
Baked goods average $1.25 per item | |||||||||||
5 year lease $45.00 per squre foot | |||||||||||
Learning objectives:
1. Analysis of a new venture and the competitive environment.
2. Identify relevant costs and types of costs: fixed, variable, start-up.
3. Financing new ventures: income statement budget and cash budget.
4. Contribution margin, break-even, and sensitivity analysis.
5. Evaluate ROI and pricing strategy.
6. Sustainability and corporate social responsibility.
Intermediate Accounting
ISBN: 978-0324312140
16th Edition
Authors: James D. Stice, Earl K. Stice, Fred Skousen