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CASE STUDY - ANNA BAKERY CAFE PROJECT Case Study Objectives Upon completion of this case study report, you should be able to: 1. apply engineering economic decision making process, 2. prepare a detailed financial analysis report, and 3. provide a professional recommendation on the finding of the study. Current Business Report Anna Bakery Caf offers casual life-style concept by offering variety selection of cakes, muffins, bagels and sandwiches either for dine in or take-away sets The caf has been operating since 2018, owned by a young graduate fresh out of college. She put up an initial investment of RM100,000 to buy the required equipment and initial renovations. She managed to secure a business loan from SME bank to be recovered within 3 vears with interest rate of 12% pa. Sales has been growing at steady rate with revenues coming from both catering and bakery divisions. Sales was slow in the initial business start. As customer confidence grew, sales doubled in the second year and expected to taper out this year. It is estimated that the direct costs from raw materials for both businesses to be 50% of the revenues and slowly reducing as their efficiency improved, thus improving the profit margin. The annual revenues for both business divisions are shown in TABLE 1, where FY2018/2019 are actual values while FY2020 is a projection TABLE 1: ABC Original Business Revenues (annual statement of income) FY2018 FY2019 FY2020 (P) 324,000 258,000 582,000 827,200 382,320 1,209,520 1,000,000 500,000 1,500,000 Revenue Catering Bakery Total Revenue Direct Cost (Material) Catering Bakery Total Direct Cost Gross Margin( Profit) Gross Margin % 195,600 85,200 280,800 301,200 52 295,720 164,140 459,860 749,660 62 330,000 180,000 510,000 990,000 As expected, salary and rental would form a significant portion of the operating expenditure. Utilities, transportation, equipment repair and general maintenance also form part of the costs. Furthermore other forms of commitment including tax, legal fee etc. is lumped into miscellaneous expenses. All budgeted expenses are tabulated in TABLE 2. For simplicity in analyzing the business profitability, the expenses is calculated based on the budgeted value rather than the actual costs. TABLE 2: ABC Original Expenses (monthly estimations) Cost Item Shop Rental Descriptions RM4000 per month for 3 years and will increase by 10% in 2021. 3% of total revenue & Utilities Transportation Repair Maintenance IT Services Staff Salary & RM500 per month per month for 3 years and will increase by 10% in 2021 RM500 per month per month for 3 years and will increase by 10% in 2021 RM100 per day for 22 per month for 3 person in 2018 and increase by 5% every year onward RM200 per day for 22 per month for 3 person in 2018 and increase by 5% every year onward RM 1000 Owner Salary Miscellaneous (tax, legal etc) It is noticed that improvement in efficiency has reduced the direct costs in the current ventures, thus increase profitability of her business. Nevertheless direct cost is also affected by fluctuation of the price of raw material and transportation. She needs to consider the bottom line to remain healthy in the presence of this variability. Moving forward, Anna plans to continue her current business at the current location, if the revenues continue as projected. For this she needs to know how good is her current business (effective rate of return) and if she were to sell her business, how much will the business is worth (if her MARR is 20%). Furthermore she is eyeing for a new location to start her second shop and Business Expansion Plan Anna plans to expand her business to a new site. She plans to put up an initial investment of RM200,000 to buy the required equipment and initial renovations. As she has a good track record, she expect to secure a business loan from the same SME bank to be recovered within 3 years with interest rate of 8% pa. As before she expect sales to grow at steady rate with revenues coming from the cafe. As customer confidence is already secured, sales is expected to double and margin to remain steady at 66%. The projected annual revenues for both business divisions are shown in TABLE 3, where all values are based on projection. 3 TABLE 3: ABC NEW business Revenues (annual statement of income) FY2021 FY2022 FY2023 1,000,000 500,000 1,500,000 1,100,000 550.000 1,650.000 1,210,000 610,000 1,820,000 Revenue Catering Bakery Total Revenue Direct Cost (Material) Catering Bakery Total Direct Cost Gross Margin(Profit) Gross Margin % 330.000 180,000 510.000 990,000 360,000 200.000 560.000 1,090,000 66 385,000 220,000 605,000 1.215,000 66 As before, salary and rental would fom a significant portion of the operating expenditure. Utilities, transportation, equipment repair, general maintenance and miscellaneous expenses are tabulated in TABLE 4. TABLE 4: ABC NEW Business Expenses (monthly estimations) Descriptions RM3000 per month for 3 years. 3% of total revenue & Cost Item Shop Rental Utilities Transportation Repair Maintenance IT Services Staff Salary RM500 per month per month for 3 years Owner Salary RM500 per month per month for 3 years RM110 per day for 22 per month for 3 person in 2021 and increase by 5% every year onward RM300 per day for 22 per month for 3 person in 2021 and increase by 5% every year onward RM 1000 Miscellaneous (tax, legal etc) As before improvement in efficiency is expected to reduce the direct costs in the current ventures, thus increase profitability of her business. Nevertheless direct cost is also affected by fluctuation of the price of raw material and transportation. In preparing the business plan, she need to prepare the sensitivity analysis in fluctuation of direct costs (ie margin fluctuation from 50% to 70%). Preparation of Case Study Brief Anna need your assistance in preparing a business brief to highlight the health of her current business and the merit of the new business venture. Discussion should include analysis of her current business, in terms of costs, revenues, NPV, IRR and breakeven conditions. In order to consider expansion of the business, additional investment must also be justified in terms of economic viability, and sensitivity conditions. For the case study provided, you are expected to study and prepare a project brief that must include (but not limited to the following steps of economic analysis: 1. Summary of project design requirement and constraints. 2. Tabulate all costs and revenues expected. State assumptions and project constraints in cash flow diagram and other suitable means. 3. Estimate net present values, equivalent annual costs, and wherever possible rate of return on investments. 4. Report on comparative analysis of potential options available, breakeven conditions and recovery period. 5. List and discuss project completion alternatives, investment alternatives and cost impact. 6. Identify critical factors that can influence decision through sensitivity analysis. 7. Provide recommendation of the most attractive options and indicate potential areas of concern