Question: Sales always decrease in the summer at The Coffee House, and Beatrice, the owner, wants to increase sales in the summer. Her plan is to
Sales always decrease in the summer at The Coffee House, and Beatrice, the owner, wants to increase sales in the summer. Her plan is to sell pre-brewed and bottled teas mochas to some of the local grocery stores in the summer. She can either: (1) purchase the equipment and produce the bottled mochas internally or (2) she can license The Coffee House name to a local bottler. If Beatrice licenses the business to the local bottler, the bottler will do all the brewing, bottling and distribution and pay Beatrice 5% on every dollar of sales. Sales from this new business are expected to be $20,000 in year 1,$40,000 in year 2 and $60,000 in year 3 . Beatrice can purchase used brewing and bottling machines for about $40,000 today, which will be worthless after 3 years. Projected sales are expected to be the same as above ($20,000 in year 1,$40,000 in year 2 and $60,000 in year 3) if The Coffee House brews its own, but the contribution margin on every dollar of sales will be about 40%. Using a cost of capital of 10%, what should Beatrice do
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