Budgeting and management control systems Individual assignment #1 – Matteo Ambrogini CASE: Cafè Xaragua
Questions 1) Prepare a forecast for the first year of operations using the information provided in the case. Clearly identify your assumptions.
See the frame used to analyze the case in Exhibit 1, the forecast in Exhibit 2, a breakdown of costs calculations in Exhibit 3, a breakdown of “Equipment & Fixture” costs and time allocation of all fixed costs in Exhibit 4. ASSUMPTIONS MADE (refer to the framework shown in exhibit 1 to identify each element: Price, Quantity, Fixed costs, Variable costs): General Assumptions: I assumed the cafè to stay opened 50 weeks, 350 days per year. Price: ...view middle of the document...
With this set of assumption, we get a loss during first year of 56372.50 $. Running the simulation with 200 drinks sold (worst case scenario) we get a loss of 133635.50 $. If we run the simulation with the best case scenario option: 300 drinks, we obtain an EBT of 20890.50 $. The second year of activity the amounts are raising by a total of 18000.00 $, which represents those expenses occurring only once. Break Even point could be reached first year with the amount of 288 drinks sold, keeping prices constant. [149 words]
3) Assuming a 15% operating income return target on the beginning investment, what sales level is needed to hit this target?
Operating Income = Sales – Operating costs [OPI = S – OPC] We want: OPI = 0.15 * S So: 0.15*S = S – OPC So: 0.85*S = OPC But: S = Price1*Quantity1 + Price2*Quantity2 + Price3*Quantity3 + Price4*Quantity4 [P1*Q1 + P2*Q2 + P3*Q3 + P4*Q4], where 1,2,3,4 are respectively: Regular drink, specialty drink, baked good, coffee bag. With the assumption of 1 customer per drink sold, we also know that: Q1 = Q2 = Q3 = 5*Q4 (data from the case) Therefore: (P1+P2+P3+0.2*P4)*Q1*0.85 = OPC So: (3+4+2.5+0.2*16.5)*0.85*Q1 = OPC
10.88*Q1 = OPC But: OPC = Fixed(day) + Variable(day) = 1172 + 0.2*P1*Q1 + 0.2*P2*Q2 + 1.25*Q3 + 0.4*P4*Q4 = 1172 + (0.6+0.8+1.25+1.32)*Q1 = 1172 + 3.97*Q1 So: OPC = 1172 + 3.97*Q1 Substituting in the previous equation: 10.88*Q1 = 1172 + 3.97*Q1 Therefore: Q1 = 169.6 Which equals to: (3+4+2.5+0.2*16.5)*169.6 = 2170.88 $ DAILY SALES So: 2170.88 * 350 = 759808 $ ANNUAL SALES It means we have to sell approximately 170 regular drinks (and so 170 specialty drinks, 170 baked goods, 34 coffee bags) per day on average, in order to hit the 15% operating income return target Since for regular drinks, the cost is 20% of the price, for specialty drinks the cost is 20% of the price, for baked goods the cost is 1.25$/unit, for the coffee bag, the margin is 60% therefore the cost is 40% of the price. [231 words]
4) Should the partners open the Café? Explain why or why not?
Assuming the average expectation on sales (250 drinks, 50% regular, 50% specialty, 125 baked goods, 25 coffee bags) the cafè will keep losing money. However they could be probably able to increase their drinks prices by 1 $ (both regular and specialty), being still below the average 5.25$ of the competition (Starbucks). The projected operating income would be 46127.50 $ the first year, 64127.50$ the second year. They could also reduce the staff wages, which are extremely higher than the average and represent 36% of revenues). Reducing wages from 16$/h to 13$/h the projected operating income would be 13927.50 $ first year, 31927.50 $ second year. Applying both the price increase and the wage decrease we can project an operating income of 83927.50 $ first year and of 101927.50 $ second year. I recommend to review pricing and staff wages, then open the cafè. [144 words]
5) If the partners open the Café and the first year's return on...