This case will require you to prepare a CM Income Statement for the upcoming summer business season. Prepare basic CM Income Statements in Excel, with all options shown on one sheet. You will have four basic CM Income Statements: the base CM Inc St, and CM Ins St for Options 1, 2 & 3.

CASE Beach SUP

Company Matt, Angad and Alina are university students who own Beach SUP, a small business that rents standup paddle boards (SUP boards) on Crescent Beach, Nova Scotia. SUP boards are becoming more popular as a summer water sport as it is relatively easy to learn, is fun and provides physical benefits from strength and balance to relaxation and outdoor, laid-back lifestyle. Currently, Beach SUP has not spent any money on advertising and it is the only company renting SUP boards on Crescent Beach. They chose this beach because it is the only beach in Nova Scotia that cars can drive along, and the beach is two kilometres long. The business operates for three months, from June 1 to August 31. They own four SUP boards, which they rent out for $25 per hour each. They estimate that boards are rented for 600 hours per month (4 boards x 30 days x 5 hours per day).

Beach SUP hires a summer student, Nadia, to help with rentals. Nadia is paid $20 per hour for 5 hours per day (30 days per month). For each hour that a paddle board is rented, the business incurs $3 supplies (wax, etc) to prepare the boards.

Beach SUP fixed costs include rent and salaries. The business rents a beach kiosk for $1,500 per month during the three summer months. They store business items in parents basements during the other 9 months. Angad is paid a salary of $3,000 per month because he works full time for Beach SUP during the three summer months. Matt and Alina have other full time summer jobs, but they share in the business (and initially invested in the business) and help to make business decisions. Beach SUP purchased the four boards two years ago for $900 each. The boards are depreciated on a straight-line basis and are estimated to have a 3-year life.

The three friends believe that the business has potential to earn more income on Crescent Beach. They are considering a few different options for next summer to boost profits and give them more money for expenses during the school year. As well, each of the three owners would like to invest part of their portion of business earnings in the TSX stock market.

OPTION 1

By extending hours of operation from 5 hours per day to 7 hours per day, Beach SUP could increase revenues. There would be no change to the rental fee of $25 per hour, but Angad would want $1,000 additional salary per month and Nadia would be working two extra hours per day.

OPTION 2

Some potential customers are unsure of using paddle boards and would benefit from a lesson. This option would include a 15-minute lesson in the first part of the hour rental. The price would increase from $25 to $35 per hour. The business would operate 6 hours per day, with Nadia working all 6 hours. Angad would be paid $3,500 salary per month. For simplicity, assume that all rentals in this option include the lesson.

OPTION 3

Instead of offering lessons, Beach SUP could consider advertising, bringing more customers to the beach. This would result in rentals for 8 hours each day (at $25 per hour). Advertising would cost $1,000 per month for the three months. Nadia could work all 8 hours each day and help with lessons, but instead of working 30 days per month Nadia would work 20 days per month (weekdays only). Angad would require $1,500 additional salary ($4,500 per month).

Case Questions:

A. Calculate CM Ratio and DOL (degree of operating leverage) for the base income statement and all three options. The answers to this question will be shown on your Excel file below each IncSt.

B. Which option (of the three given) would provide the highest CM (contribution margin) and which would provide the highest profit?

C. Which option is best for next year based on both CM Ratio and DOL?

D. Would the option with the highest profit (answer to part A) be the best choice, considering uncertainties of the business? Discuss in a few bullet points. Write as specifically as you can.

E. Do you think there are other costs that are not included in this case? Name three.